As Tariffs Increase, So Too May the Use of False Claims Actions to Pursue Customs Fraud - WilmerHale

The landscape of international trade compliance is becoming increasingly complex, particularly with the imposition of significant tariffs, such as the Section 301 tariffs on goods from China and Section 232 tariffs on steel and aluminum. These elevated duties, while intended to protect domestic industries, also create a strong incentive for some companies to engage in fraudulent practices to avoid paying the higher costs. Experts are now warning that this environment is likely to lead to a surge in enforcement actions under the False Claims Act (FCA), targeting customs fraud.

The False Claims Act is a powerful tool that allows private citizens, known as relators or whistleblowers, to file lawsuits on behalf of the U.S. government against individuals or companies that have defrauded the government. If successful, the relator receives a share of the recovered funds, which can be a substantial incentive. When it comes to customs fraud, common schemes targeted by FCA actions include misclassifying goods under a lower-duty Harmonized Tariff Schedule (HTS) code, undervaluing imported merchandise, misrepresenting the country of origin, or illegally transshipping goods through third countries to circumvent tariffs. Penalties under the FCA are severe, including treble damages (three times the actual damages suffered by the government) plus civil penalties per false claim, which currently range from $13,508 to $27,018, adjusted annually for inflation.

This heightened risk directly impacts any company involved in importing goods subject to these tariffs, especially those with complex global supply chains. Importers, customs brokers, and internal trade compliance officers are particularly vulnerable, as they are on the front lines of ensuring accurate and compliant declarations. The substantial financial burden of increased tariffs can pressure companies to seek ways to reduce costs, inadvertently or intentionally leading to practices that could be construed as customs fraud under the FCA. The government, along with potential whistleblowers, is keenly aware of these incentives and is expected to increase scrutiny.

What Importers Should Do Now

To mitigate the significant risks associated with increased tariffs and potential False Claims Act actions, importers should take proactive and comprehensive steps to bolster their compliance programs.

• Review and Update Compliance Programs: Conduct a thorough review of existing internal compliance programs and policies to ensure they adequately address the complexities of current tariff regimes and the specific risks of customs fraud.
• Conduct Internal Audits: Regularly audit import declarations, classification decisions, valuation methodologies, and country of origin determinations. Pay close attention to high-value goods or those subject to significant tariff increases.
• Employee Training: Provide robust and ongoing training to all employees involved in the import process, including purchasing, logistics, finance, and compliance teams. Emphasize the importance of accurate data and the severe consequences of non-compliance.
• Scrutinize Supply Chains: Carefully examine supply chain routes and practices, particularly for goods originating from tariff-affected countries, to identify and eliminate any potential for illegal transshipment or misrepresentation of origin.
• Seek Expert Guidance: Consult with trade law experts or legal counsel if potential issues are identified or if there is uncertainty regarding specific tariff classifications or compliance requirements.
• Consider Voluntary Disclosures: If non-compliance is discovered, consider making a voluntary disclosure to U.S. Customs and Border Protection (CBP). This proactive step can significantly mitigate potential penalties and demonstrate a commitment to compliance.

By taking these measures, companies can better protect themselves from the escalating risks of customs fraud allegations and False Claims Act enforcement actions in the current high-tariff environment.