Customs Fraud: The Dangers You Need to Know
What is customs fraud?
Customs fraud, also known as duty evasion, happens when importers and eCommerce sellers misreport the value of their imported goods, manipulate invoices, or fail to disclose information to customs officials. Even though it’s risky, many choose to turn a blind eye to this behavior and write it off as not being such a big deal. Even if they don’t engage in it themselves, the reality is that customs fraud can lead to fines, penalties, and even arrest.
So how did it start? Customs fraud is very common as the amount of commodity flow to the US is too high which makes checking every container impossible. Hence, it became very easy for many small-medium sellers or importers to use the service of a freight forwarder who ships their goods in an illegal practice. The issue became even more common since 2018, after additional tariffs were imposed on goods imported from China, aka the trade war.
Under Section 301 of the Trade Act of 1974, the United States Trade Representative (USTR) can enforce U.S. rights under trade agreements and address unfair foreign barriers to U.S. exports. What does it actually mean for importers? Section 301 allows the US to impose additional tariffs on goods originating from China. The tariffs are ranging between 7.5% to 25% in addition to the previous customs rate that used to be imposed. Many sellers and exporters face heavy costs associated with Section 301, which has led to them engaging in illegal activities and committing customs fraud.
What types of customs fraud are there?
There are many types of customs fraud, here are the most common ones:
- Undervaluation/ devaluation– reporting a merchandise value lower than the actual value, to lower the import duty. The most common type of customs fraud. Example: Goods worth 5,000$, but the importer provided a fake invoice which shows the value is only 900$.
- Misclassification– Each product has a unique HS code that takes into consideration various aspects, and of course, its own duty. Misclassification happens when an importer intently provides the wrong HS code in order to reduce its duties. Example: One item’s HS code has 25% customs so the importer provides another (wrong) HS code that doesn’t have customs or has a much lower duty.
- Transshipment– This method takes place when the importer tries to hide the origin of the product to avoid duties. It can be either by writing the wrong origin or by shipping first to other countries before importing to the US. Example: Due to the high duties on goods originating from China, an importer decides to ship the goods first to South Korea and then ship into the US like they were made in Korea.
- Structuring/ splitting – An importer splits his goods into many separate shipments to avoid arriving at a volume that will require him to pay duties. Example: Separate goods into a few shipments that each one does not meet with the volume that requires paying duties but altogether does.
How do the US regulators identify fraud?
Homeland Security Investigations (HSI) has more than 10,000 employees and more than 7,000 special agencies across the country, as well as in 53 countries outside the country. The HSI conducts investigations to catch customs offenders. In addition, the CPB collaborates with the ICE HSI to reform the Trade Enforcement Coordination Centers (TECC). Through the TECC CPB and HSI work together to identify and investigate customs violations. Moreover, there are technologies that help identify customs fraud in the market today, we do not know what tools are being used by the US CBP.
Customs fraud risks and penalizations
Conducting customs fraud violates the false claim act. In order to eradicate the common phenomenon, the US government allows anyone in the US and outside to file a Qui Tam to help the US to condemn customs offenders.
Your risk does not end in customs clearance – Qui Tam lawsuit
Qui tam (Latin: who as well. meaning: In the name of the king) – is an action that is brought by a person on behalf of the government. What it actually means is that anyone everywhere can file a Qui Tam claim. In short, the Qui Tam lawsuit is when whistleblowers report individuals or companies that make false claims for government funds. Anyone can report customs fraud to the US government. The claim can be against the employer, competitor, or others. When filing the Qui Tam a person can earn up to 30% of the government’s recovered amount for the help which creates a great motivation. Therefore, if you plan to falsely report your imports you can’t be relaxed just because you were not caught at the customs clearance, as you may find yourself under a Qui Tam claim against you.
Risks and Possible Penalizations
To keep your business successful, you need to know about the risks of customs fraud. As we already mentioned, doing shady business in the US can put you at risk not only at the moment of customs clearance but also afterward if you get caught. In that case, the Customs and Border Protection (CBP) can recover up to three times the actual amount of the fraud in addition to civil criminal penalties for each violation. Even when it is tempting, it is probably not a good idea to cheat the US Customs and Border Protection. Fraudulent customs practices can lead to severe financial losses as well as imprisonment. Recently, a Los Angeles garment company owner was sentenced to 12 months in federal prison for undervaluing imported clothes to avoid paying duties.
How can you protect yourself and your business?
Many importers and eCommerce businesses are trying to find ways to reduce operation and logistics costs to earn more but you should not be easy-minded when it comes to customs. You may be involved in customs fraud without even knowing! Here are a few ways you can ensure you won’t get in trouble while importing your goods to the US.
Work with trusted forwarders only
New small logistics companies open every day, those businesses can operate illegally and shut down when getting caught and open new ones instead. In order to protect your business, work with trusted logistics companies that won’t risk your (and their) business for such frauds. By partnering with a reliable company you can make sure everything complies with US regulations. Note that some companies may be involved in fraudulent practice for many years and still seem reliable, you should actively ask about it.
Suspect extremely low-cost shipping rate
If you are suggested a very low-cost DDP (Delivered Duty Paid) shipping, you should check if they are committing customs fraud. They probably devalue or misclassify goods. Ask your forwarder to provide proof that all duties and taxes were paid according to the applicable law.
Check who is the IOR
The Importer Of Record is usually a buyer or seller who owns the goods at some point or a US customs broker. However, freight forwarders can also act as IOR on some occasions. Basically every company, even a foreign one can become an IOR and own a bond. Check if they are one of the above. You may think that if you are not the IOR you are safe but the truth is, the CBP can easily track down the individuals and companies importing under the IOR.
Do your own research
The best practice is to trust yourself. Make sure to check your HS code yourself, and get yourself familiar with all the taxes and duties you have to pay. By doing so you can be sure that your business complies with the law..
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