One of the few federal agencies not slated for funding cuts under President Trump’s proposed budget is US Customs and Border Protection.‭ ‬In fact,‭ ‬CBP,‭ ‬which is responsible for enforcing US customs and trade laws,‭ ‬is proposed to receive an additional‭ ‬$300‭ ‬million to recruit,‭ ‬hire,‭ ‬and train thousands of new personnel.‭

On March‭ ‬31,‭ ‬2017,‭ ‬President Trump signed an executive order calling for CBP to ramp up its efforts to combat customs law violations‭ – ‬in particular,‭ ‬breaches of antidumping and countervailing duty orders1‭ – ‬as an element of the administration’s trade policy of preventing foreign competitors from gaining an unfair advantage over US industries.‭

With these developments,‭ ‬we can expect stepped up efforts to counter import duty evasion under President Trump.‭ ‬CBP has authority under the US Tariff Act to assess penalties and seize merchandise for trade violations including duties underpayment.‭ ‬But schemes to evade import duties through fraud‭ – ‬for example,‭ ‬by misrepresenting goods‭’ ‬country of origin in order to avoid antidumping or countervailing duties‭ – ‬increasingly are being prosecuted by the US government,‭ ‬aided by whistleblowers,‭ ‬under the US False Claims Act.‭ ‬We expect this trend to accelerate under the new administration given its trade objectives.‭

Trade enforcement under the False Claims Act
The False Claims Act is the US government’s primary anti-fraud tool.‭ ‬It imposes significant civil liability‭ – ‬three times damages,‭ ‬plus penalties‭ – ‬on parties found to have knowingly overcharged‭ (‬or underpaid‭) ‬federal agencies.‭ ‬The statute dates back to the Civil War,‭ ‬when Congress enacted it to combat fraud by suppliers of materiel to the Union Army.‭

A key feature of the False Claims Act is its qui tam provision,‭ ‬pursuant to which private parties with knowledge of fraudulent conduct‭ – ‬whistleblowers or‭ “‬relators‭” – ‬can file lawsuits on the government’s behalf.‭ ‬The government has the right to intervene in and take over the lawsuit after investigating the allegations.‭ ‬Whistleblowers are incentivized through rewards of‭ ‬15‭ ‬percent to‭ ‬30‭ ‬percent of the recovery obtained from the violator,‭ ‬which can be sizable.

Whistleblowers in False Claims Act lawsuits involving customs violations have generally been former or present employees of the violator‭ – ‬i.e.,‭ ‬parties with inside knowledge of the wrongdoing.‭ ‬Competitors,‭ ‬consultants,‭ ‬and others with expertise in particular markets,‭ ‬however,‭ ‬increasingly are whistleblowers in this area.‭ ‬In some cases,‭ ‬claims have been asserted not just against the importer,‭ ‬but also downstream third-party customers on the theory that those parties participated in and benefitted from the violations.‭

The influential United States Attorney’s Office for the Southern District of New York has been particularly active in prosecuting customs enforcement cases under the False Claims Act.‭ ‬Not surprisingly,‭ ‬most such cases involve imports from the People’s Republic of China,‭ ‬the United States‭’ ‬largest goods trading partner.‭

Three types of violations are prevalent in these lawsuits‭ – ‬transshipment,‭ ‬undervaluation,‭ ‬and tariff misclassification.

Third country transshipment
Transshipment frauds involve disguising imports‭’ ‬country of origin in order to evade antidumping and countervailing duties.‭ ‬The goods are shipped to third countries before being re-shipped to the US with the documentation manipulated to conceal the true source country.‭ ‬Frequently,‭ ‬such schemes involve false product markings or packaging designed to look like goods produced in the third country,‭ ‬making detection difficult.

One example is the Univar case.‭ ‬There,‭ ‬the violator allegedly evaded antidumping duties on imports of the artificial sweetener saccharin from the PRC by transshipping the product through Taiwan,‭ “‬re-bagging‭” ‬it,‭ ‬and falsely identifying Taiwan as the country of origin.‭ ‬The whistleblower‭ – ‬a US saccharin distributor that competed with the violator‭ – ‬uncovered the scheme by analyzing trade data and investigating Taiwanese manufacturing capabilities.‭ ‬It traced Taiwanese saccharin imports from the PRC to matching saccharin exports to the US,‭ ‬and found that no factories in Taiwan even possessed the chemical-use permits required to make saccharin.‭ ‬The government sued Univar to recover unpaid antidumping duties and penalties in a lawsuit now pending in the US Court of International Trade in New York.

Another transshipment case was Tai Shan Golden Gain Aluminum Products.‭ ‬There,‭ ‬four US manufacturers allegedly colluded to evade antidumping and countervailing duties on aluminum extrusions that they imported from the same suppliers in the PRC.‭ ‬The manufacturers arranged to transship the goods through Malaysia‭ – ‬falsely relabeling them as Malaysian in origin‭ – ‬using a dummy,‭ ‬front corporation that they set up to be the importer of record.‭ ‬The government intervened,‭ ‬and,‭ ‬in‭ ‬2015,‭ ‬reached settlements with the defendants totaling‭ ‬$4.5‭ ‬million.‭ ‬The whistleblower,‭ ‬a Florida-based Asia-Pacific trade consultant,‭ ‬received‭ ‬18‭ ‬percent as a reward.‭

Undervaluation frauds‭
When goods are entered,‭ ‬the importer is required to declare their value and submit verifying commercial invoices.‭ ‬Undervaluation frauds generally involve false declarations accompanied by fake invoices containing understated prices.‭ ‬Sometimes this occurs as part of a double-invoice scheme in which the importer issues corresponding true invoices,‭ ‬reflecting accurate prices,‭ ‬to its US customers.‭ ‬In other instances,‭ ‬the fraud involves the submission of invoices from a purportedly unrelated third-party manufacturer,‭ ‬when,‭ ‬in fact,‭ ‬the manufacturer is an affiliate of the importer and the invoices therefore fail to satisfy the requirement that they be‭ “‬arm’s length.‭” ‬Still other undervaluation frauds involve the failure to include the cost of‭ “‬assists‭” – ‬items or services supplied by the importer to the manufacturer‭ – ‬in the values declared to CBP as required.

In the Motives case,‭ ‬for example,‭ ‬the whistleblower alleged that the violator provided CBP with fake invoices undervaluing certain apparel imports while secretly issuing a second set of true invoices‭ – ‬characterized as‭ “‬debit notes‭” – ‬to its customers reflecting the actual amounts charged.‭ ‬The government intervened,‭ ‬and,‭ ‬in July‭ ‬2016,‭ ‬the defendants paid‭ ‬$13.4‭ ‬million to settle the claims.

Similarly,‭ ‬in Yinghsun Garments,‭ ‬a case currently being litigated in federal court in New York,‭ ‬the whistleblower alleges that an apparel manufacturer evaded millions of dollars in import duties through a double-invoice scheme that resulted in undervaluing its imports by‭ ‬75‭ ‬percent.‭ ‬The government intervened,‭ ‬bringing claims against one of the manufacturer’s US customers as well.‭ ‬The government alleges that the customer violated the False Claims Act by failing to monitor the manufacturer’s customs entry practices,‭ ‬accepting‭ “‬irregular‭” ‬documentation from the manufacturer,‭ ‬and providing it with‭ “‬assists‭” ‬in the form of fabric without taking appropriate steps to ensure that their cost was included in the declared entry value.‭ ‬The government has also claimed that the customer profited from the scheme by receiving‭ “‬below-market‭” ‬prices on the garments that it purchased from the manufacturer.‭

And in Otter Products,‭ ‬a Colorado case,‭ ‬a producer of protective cases for mobile devices allegedly underpaid millions of dollars in import duties by failing to include the value of engineering,‭ ‬design,‭ ‬and product-mold‭ “‬assists‭” ‬that it provided to its overseas manufacturers in its entry declarations.‭ ‬The whistleblower‭ – ‬a former logistics coordinator for the company who was fired after trying to bring it into compliance‭ – ‬received a reward of‭ ‬20‭ ‬percent of the‭ ‬$4.3‭ ‬million that the company paid to settle the case in April‭ ‬2014.‭

Tariff misclassification‭
Tariff misclassification frauds involve attempts to misrepresent the type of goods being imported in order to declare them under incorrect duty classifications.‭ ‬The violator’s goal may be to evade antidumping or countervailing duties,‭ ‬get a lower duty rate,‭ ‬or avoid duties altogether.‭

A prime example is the AmeriSource case.‭ ‬There,‭ ‬an importer allegedly evaded antidumping duties on small diameter graphite electrodes‭ (‬a product used in steel manufacturing‭) ‬from the PRC by misclassifying the goods as larger diameter electrodes not subject to such duties.‭ ‬It paid‭ ‬$3‭ ‬million to settle the claims in February‭ ‬2016.‭ ‬The whistleblower‭ – ‬a competitor of the violator that lost business due to the violator’s underselling‭ – ‬uncovered the fraud through its own market checks and analysis of public trade data.‭ ‬It received a‭ ‬16‭ ‬percent reward.

Another example is the FSM Group case.‭ ‬There,‭ ‬an importer of military grade ultra-fine magnesium powder from the PRC falsely identified the goods on its entry documents as magnesium desulphurization reagent‭ – ‬a distinct product made up‭ ‬90‭ ‬percent of magnesium powder.‭ ‬It thereby avoided antidumping duties of over‭ ‬300‭ ‬percent.‭

The False Claims Act whistleblower,‭ ‬a competitor of the violator,‭ ‬discovered the fraud through its own investigation.‭ ‬It found evidence that the violator was importing the ultra-fine magnesium powder under the guise of magnesium desulphurization reagent by shipping it with aluminum rods‭ – ‬easily removed after delivery‭ – ‬comprising‭ ‬10‭ ‬percent by weight of each package.‭ ‬The government intervened,‭ ‬and the violator settled the claims in March‭ ‬2016‭ ‬for‭ ‬$8‭ ‬million.‭

Notably,‭ ‬the misclassification of the goods in FSM Group was part of a larger scheme in violation of the False Claims Act.‭ ‬After importing the ultra-fine magnesium powder,‭ ‬the violator supplied it to a US military contractor,‭ ‬falsely passing it off as manufactured in the US or Canada‭ – ‬not overseas‭ – ‬in order to meet governmental contracting requirements.‭ ‬Five former employees and agents of the violator pled guilty to criminal offenses in connection with the scheme and were ordered to pay‭ ‬$14‭ ‬million in restitution.

Another,‭ ‬rarer type of duty evasion scheme is‭ “‬failure to manifest‭” – ‬otherwise known as smuggling.‭ ‬This is when an importer circumvents duties by failing to declare the goods at all on its entry documents.‭ ‬These types of schemes generally are prosecuted under criminal laws,‭ ‬but may also form the basis for whistleblower lawsuits under the False Claims Act.‭

The US government recovered‭ ‬$4.7‭ ‬billion from False Claims Act litigation last year,‭ ‬of which‭ ‬$2.9‭ ‬billion came from cases initiated by qui tam whistleblowers who received a total of‭ ‬$519‭ ‬million in rewards.‭ ‬Although duty evasion cases accounted for a small fraction of this haul‭ – ‬the bulk came from cases relating to health care and defense spending‭ – ‬we anticipate more activity in this area under the new administration.‭ ‬The result should be a higher rate of government intervention in whistleblower actions,‭ ‬larger recoveries,‭ ‬and more substantial whistleblower rewards.‭

Mark A. Strauss is a whistleblower lawyer and the founder and managing member of Mark A. Strauss Law, PLLC, in New York, New York.  A successful anti-fraud attorney with more than 20 years of experience, he represents whistleblowers in qui tam lawsuits under the False Claims Act and has handled a number of successful customs fraud cases.  His efforts have resulted in the recovery of hundreds of millions of dollars for clients. He can be reached at mstrauss@markastrausslaw.com