Understanding the False Claims Act and Customs Fraud Under Current Trade Policies

The False Claims Act (FCA) has long been a cornerstone in the U.S. government’s efforts to combat fraud against federal programs. While traditionally associated with healthcare and defense contracting, the FCA’s reach extends into international trade, particularly concerning customs fraud. With the current administration’s intensified focus on addressing trade deficits through aggressive tariff policies, there’s a renewed emphasis on enforcing the FCA to deter and penalize customs-related violations.

The False Claims Act and Its Relevance to Customs Fraud

Enacted during the Civil War to address fraudulent suppliers, the FCA imposes liability on individuals and companies that defraud governmental programs. A critical component of the FCA is the “reverse false claims” provision, which targets entities that knowingly avoid paying obligations to the government, such as customs duties and tariffs. This provision is particularly pertinent to importers who may attempt to evade tariffs by misrepresenting the value, classification, or origin of imported goods.

The Administration’s Trade Policies and Their Implications

The administration has implemented a series of tariffs targeting imports from key trading partners to reduce the trade deficit. Notably, a 10% tariff was imposed on all Chinese imports, followed by a 25% tariff on most imports from Canada and Mexico. A universal baseline tariff of 10% was introduced, with higher rates applied to countries that significantly contribute to the trade deficit. These measures have substantially increased the cost of importing goods, thereby heightening the incentive for some importers to engage in fraudulent practices to minimize tariff liabilities.

Typical Schemes in Customs Fraud

Importers may employ various tactics to evade tariffs, including:

Misclassification of Goods: Deliberately mislabeling products under incorrect Harmonized Tariff Schedule (HTS) codes to attract lower duty rates.

Undervaluation: Underreporting the value of goods results in reduced duties owed.

Falsifying Country of Origin: Misrepresenting the origin of goods to benefit from favorable trade agreements or to avoid country-specific tariffs.

Transshipment: Routing goods through third countries to disguise their true origin.

Double Invoicing: Multiple invoices are issued to present a lower value to customs authorities while paying the supplier more.

Engaging in such practices violates customs laws and triggers FCA liability, exposing companies to significant financial penalties.

Enforcement Trends and Notable Cases

The Department of Justice (DOJ) has signaled a robust enforcement stance against customs fraud under the FCA. Since 2011, over 40 FCA cases related to customs violations have been resolved, with nearly half occurring since 2023. These cases have resulted in recoveries nearing $250 million.

Noteworthy settlements include:

• A $3.1 million settlement with a chemical products company for misclassifying hazardous chemicals as non-hazardous.
• Over $10 million in settlements with wiring and power products companies for invoice manipulation.
• A $45 million settlement with a printing inks manufacturer for misrepresenting the country of origin to avoid antidumping duties.

These cases underscore the DOJ’s commitment to leveraging the FCA to curb customs fraud.

The Role of Whistleblowers

The FCA’s qui tam provisions empower private individuals, known as relators, to file lawsuits on behalf of the government against entities committing fraud. Relators are incentivized through potential awards ranging from 15% to 30% of the recovered funds. In the context of customs fraud, whistleblowers have played a crucial role in exposing complex schemes that might otherwise remain undetected.

Compliance Measures for Importers

Given the heightened enforcement landscape, importers should proactively:

Conduct Regular Audits: Ensure accurate classification, valuation, and origin declarations.

Implement Robust Compliance Programs: Develop internal controls and training programs to prevent and detect fraudulent activities.

Engage Trade Experts: Consult with customs and trade professionals to navigate complex regulations.

Monitor Supply Chains: Maintain transparency and traceability to verify the authenticity of goods’ origins.

Contact the Law Office of Peter Katz to Learn More

The convergence of aggressive trade policies and the expansive reach of the False Claims Act has created a challenging environment for importers. Companies must exercise heightened diligence in their customs practices to avoid substantial legal and financial repercussions. By fostering a culture of compliance and transparency, businesses can mitigate risks and contribute to fair and lawful international trade.