Introduction
In a series of actions since Inauguration Day, President Trump has imposed steep tariffs on key U.S. trading partners across a broad swath of industries. At the same time, the U.S. Department of Justice (“DOJ”) has promised to ramp up use of the False Claims Act (“FCA”)—DOJ’s primary tool against fraud on government agencies—to police tariff compliance. The effect will likely be a redoubling of DOJ’s already aggressive application of the FCA to trade matters, fueled by tariffs’ status as a top policy and political priority. The risks for businesses are significant and likely will affect a broader range of industries than DOJ has historically targeted with trade-related FCA actions.
Read also: Trump’s Tariffs: What Supply Chain and Procurement Professionals Need to Know
President Trump’s Tariffs and the FCA Stakes
President Trump has imposed unprecedented and far-reaching tariffs on imports from some of the United States’ largest trading partners. Under the new tariff regime, any company importing virtually any item from anywhere now owes at least 10% of the value of that item to the U.S. government—and up to 145%, or more, for goods from China. Particularly for companies that import expensive products and materials in large volumes, this can mean massive sums in financial obligations to the U.S. government.
The FCA prohibits, among other things, the fraudulent retention of monies that a person or company is obligated to pay to the United States. Courts have acknowledged the viability of this FCA theory in the customs context, premised on allegations that a company was required to pay customs duties and knowingly or recklessly failed to satisfy that obligation.
The financial consequences of FCA liability can be severe. The statute imposes treble damages, measured as three times the amount of loss the government sustains because of a violation. In the trade context, the most likely measure of damages is the difference between the amount a company paid in customs duties and the amount the government claims it should have paid, times three. An additional civil penalty attaches to each violation of the statute, which in the trade context would likely be at least every invoice the government alleges a company used to fraudulently underpay duties. The trigger for the penalty could potentially be each item that is subject to duties. The current range for FCA penalties is $14,308 to $28,619 per claim, and that amount is adjusted each year to account for inflation. Beyond damages and penalties, companies can face significant defense costs in pre-litigation investigations by DOJ.
FCA Enforcement Against Alleged Customs Fraud
DOJ has used the FCA against alleged customs fraud across industries and with significant financial consequences. Since 2011, there have been over 40 resolutions of FCA matters involving alleged customs violations, with nearly half occurring since 2023. The resolutions since 2011 have netted the government nearly $250 million in recoveries, with larger settlements reaching into the tens of millions of dollars. Of the resolutions since 2011, 35 involved qui tam relators—private whistleblowers whom the FCA authorizes to sue in DOJ’s name and in return for a share of any proceeds from the litigation.
The following representative examples provide a window into the kinds of cases DOJ is likely to pursue in higher volumes, and with greater potential financial consequences, in the future.
- Misclassification. In March 2024, DOJ reached a $3.1 million settlement with a U.S. chemical products company which allegedly imported hazardous chemicals into the United States and misclassified them as non-hazardous goods.
- Undervaluation. In August 2024, DOJ settled for over $10 million with wiring and power products companies and almost $7.7 million with a clothing manufacturer, each of whom allegedly altered the prices on the invoices they submitted to the government.
- Country of origin. In December 2012, a printing inks manufacturer reached a $45 million settlement with DOJ for allegedly misrepresenting its imports’ countries of origin as Japan and Mexico, rather than China and India, to avoid paying antidumping and countervailing duties.
- Conspiracy. In 2016, a U.S. defense contractor paid $6 million for allegedly using ultrafine magnesium imported from China in flares it manufactured and sold to the U.S. Army in violation of its contract with the military. While it was the importer who owed customs duties and allegedly misrepresented the magnesium’s country of origin, DOJ alleged that the downstream contractor conspired with the importer to sell the government the nonconforming goods.
Industry Implications
President Trump’s tariffs mean that the frequency and financial stakes of customs-related FCA cases are likely to increase rapidly. Given the opportunities DOJ and relators already have had to test customs-related FCA theories, they are likely to experience little of the learning curve that often characterizes the development of brand-new FCA theories. Moreover, both DOJ and relators likely will be emboldened by the potential for significantly higher recoveries and by the perceived enforcement flexibility afforded by the new tariffs’ broad application. We expect DOJ and relators will seek the same nine- and ten-figure monetary recoveries in customs-related cases that they have long sought—and frequently obtained—in FCA cases outside the trade context.
Companies in the following industries can expect to face particularly close FCA scrutiny:
- Automobile and automobile parts;
- Medical devices;
- Pharmaceuticals and dietary supplements;
- Furniture, textiles, and other retail products;
- Steel, aluminum, and other metals or metal alloys; and
- Technology hardware.
To mitigate risk, companies should ensure that they have robust mechanisms in place to detect, report, and remedy instances of noncompliance with customs requirements, including comprehensive employee training. Companies should also review their compensation practices to ensure that any incentive compensation tied to cost reduction and process optimization is not incentivizing inappropriate attempts to reduce customs duty obligations. It will also be critical for companies to review the terms of their contractual relationships with upstream and downstream business partners, to ensure that the risk of government scrutiny is appropriately allocated and, where appropriate, to require contractual counterparties to comply with company policies and procedures.
