President-elect Trump has repeatedly stated that he will increase tariffs. While it is unclear to what extent, while campaigning he proposed a 10% to 20% tariff on all imports and an additional 60% or more on goods from China. (https://www.msn.com/en-us/money/markets/trade-sector-eyes-a-new-wave-of-tariffs-under-trump/ar-AA1tDjhv?ocid=BingNewsSerp). More recently he said he would impose a 25% tariff on all goods from Mexico and Canada and an additional 10% tariff on all products from China. (https://www.wsj.com/politics/policy/trump-pledges-tariffs-on-mexico-canada-and-china-3c62b1f7). These increased tariffs could lead to more aggressive tactics by companies.

The Wirskye Law Firm has partnered with the Braumiller Law Group to represent individuals and entities in civil False Claims Act and criminal investigations and cases involving allegations of customs fraud intended to reduce tariff payments. The alleged misconduct in these cases generally falls in the following areas which affect the duties: (1) misrepresenting the classification/type of product, (2) undervaluing the product, and (3) misrepresentation of the country of origin and/or transshipment cases. While these matters seem straightforward, such issues are surprisingly complicated. Guidance and regulations can be confusing, and appropriate classification of a product can be challenging. Similarly, the country of origin is often unclear when manufacturing occurs in multiple countries.

Below are examples of some recent cases involving alleged customs fraud. Future cases will almost certainly include similar allegations and fact patterns.   

Civil False Claims Act Cases

The False Claims Act (FCA) is a federal law that imposes civil liability on any person who submits false claims to the federal Government. The law imposes treble damages and civil penalties on those who submit false claims. In fiscal year 2023, FCA settlements and judgements totaled almost $2.7 billion. While healthcare continues to be the primary area of recovery, increased tariffs will likely result in additional FCA customs fraud cases. Under the FCA, whistleblowers (called “relators”) can file cases under seal on behalf of the government. The government then opens an investigation to determine whether they should intervene in the case. The Relators who bring fraud to the Government’s attention share in the recovery obtained by the Government. A detailed discussion of the FCA can be found at https://wirskyelawfirm.com/false-claims-act-basics/.

Homestar North America LLC

In December 2023, Homestar North America LLC (Homestar) agreed to pay $798,334 to resolve allegations that it violated the FCA by failing to pay customs duties owed for furniture imports from China. This settlement resolved allegations that Homestar and its Chinese parent company conspired to underreport the value of imports delivered to Homestar following two increases on Section 301 tariffs for certain products manufactured in China under the United States’ Harmonized Tariff Schedule (HTS).

The underpaid duties were allegedly based on the underreported value of the goods between September 2018 and December 2022. The Government alleged that the invoices were created and submitted to the United States Customs and Border Protection (CBP) containing false, lower values for the goods.

This case was filed by a whistleblower in the Eastern District of Texas under the FCA, and the Government subsequently intervened. (U.S. ex rel. Larry J. Edwards, Jr. v. Homestar North America, LLC, Cause No. 4:21-cv-00148 (E.D. Tex.)). The whistleblower received approximately $151,683, which was 19% of the Government’s recovery. (https://www.justice.gov/usao-edtx/pr/importer-agrees-pay-798334-resolve-allegations-underpayment-customs-duties).

Ford Motor Company

In March 2023, Ford Motor Company (Ford) agreed to pay the United States $365 million to resolve allegations that it violated the Tariff Act of 1930 by misclassifying and understating the value of hundreds of thousands of its Transit Connect vehicles. This settlement is one of the largest recent customs penalty settlements.

The non-admission settlement resolves allegations that Ford devised a scheme to avoid higher duties by misclassifying cargo vans. Specifically, the Government alleged that from April 2009 to March 2013, Ford imported Transit Connect cargo vans from Turkey into the United States and presented them to CBP with sham rear seats and other temporary features to make the vans appear to be passenger vehicles. The Government alleged that Ford included these seats and features to avoid paying the 25% duty rate applicable to cargo vehicles instead of a 2.5% duty rate. The settlement also resolves allegations that Ford avoided paying import duties by under-declaring to CBP the value of certain Transit Connect vehicles. (https://www.justice.gov/opa/pr/ford-motor-company-agrees-pay-365m-settle-customs-civil-penalty-claims-relating).

International Vitamins Corporation

In January 2023, International Vitamins Corporation (IVC) entered a civil settlement for $22,865,055 admitting that it misclassified 32 of its products imported from China under the HTS as duty-free, over an almost five-year period. IVC also admitted that even after it retained a consultant in 2018 who informed IVC that it had been misclassifying the covered products, IVC failed to implement the correct classifications for over nine months and never remitted duties that it had underpaid to the United States because of its misclassification.

In connection with the filing of the lawsuit and settlement, the Government joined a FCA whistleblower lawsuit (Case No. 19-Civ-9550 (S.D. N.Y.)). The relator was a former financial analyst at IVC. (https://www.justice.gov/usao-sdny/pr/us-attorney-announces-228-million-settlement-civil-fraud-lawsuit-against-vitamin).

Alexis LLC

In August 2024, women’s apparel company Alexis LLC (Alexis) paid $7,691,999.63 to resolve a FCA case also initially filed by a whistleblower (Case No. 1:22-cv-21412-FAM (S.D. Fla.)). The settlement, which was not an admission of liability by Alexis, resolved claims that from 2015 to 2022, Alexis violated the FCA by materially misreporting to CBP the value of imported apparel and thereby avoided paying the customs duties and fees owed on the imports. Alexis did, however, admit and acknowledge certain errors and omissions regarding the value and information reported on Customs forms, including classification errors and incorrect port of entry. 

In negotiating this settlement, Alexis and its senior management received benefits for its cooperation with the Government. For example, Alexis voluntarily and timely submitted relevant information and records to the Government. These submissions assisted the Government in determining losses caused by the underreporting of customs duties on the imported apparel. Also, Alexis and its management implemented compliance procedures and employee training to prevent future issues. (https://www.justice.gov/usao-sdfl/pr/us-attorney-lapointe-announces-76-million-settlement-civil-false-claims-act-lawsuit).

Samsung C&T America, Inc. (SCTA)

In February 2023, Samsung C&T America, Inc. (SCTA) resolved an FCA lawsuit that was initially filed by a whistleblower. SCTA admitted that, between May 2016 and December 2018, it misclassified imported footwear under the HTS and underpaid customs duties in a civil FCA settlement with the Department of Justice (DOJ). SCTA further admitted that it had reason to know that certain documents provided to its customs brokers inaccurately described the construction and materials of the imported footwear and that SCTA failed to verify the accuracy of this information before providing it to its customs brokers.

SCTA, with its business partner, imported footwear manufactured overseas, including from manufacturers in China and Vietnam.  The tariff classifications for footwear depend on the characteristics of the footwear, including the footwear’s materials, construction, and intended use. Depending on the classification of the footwear, the duties varied significantly.

In the settlement agreement, SCTA specifically admitted and accepted responsibility for the following conduct:

• As the importer of record (IOR), SCTA was responsible for paying the customs duties on the footwear and providing accurate documents to CBP to allow CBP to assess accurate duties.
• SCTA and its business partner provided SCTA’s customs brokers with invoices and other documents and information that purportedly reflected the tariff classification of the footwear under the HTS, as well as the corresponding materials and construction of the footwear. SCTA knew that its customs brokers would rely on the documents and information to prepare the entry summaries submitted to CBP, which required classifying the footwear under the HTS, determining the applicable duty rates, and calculating the amount of the customs duties owed on the footwear.
• SCTA had reason to know that certain documents provided to its customs brokers, including invoices, inaccurately stated the materials and construction of the footwear. SCTA failed to verify the accuracy of this information before providing it to its customs brokers. Thus, SCTA materially misreported the classification of the footwear under the HTS and misrepresented the true materials and construction of the footwear.
• SCTA, through its customs brokers, misclassified the footwear at issue on the associated entry documents filed with CBP and, in many instances, underpaid customs duties on the footwear.

This case makes clear that the company and/or IOR bears responsibility for accurately reporting to CBP and that the Government will not allow them to pass the blame to the customs broker when they are providing the customs broker with inaccurate information. (https://www.justice.gov/usao-sdny/pr/us-attorney-announces-1-million-settlement-civil-fraud-lawsuit-against-trading-company).

King Kong Tools LLC (King Kong)

In November 2023, a German company and its American subsidiary agreed to pay $1.9 million to settle allegations of customs fraud under the FCA. The Government alleged that King Kong was falsely labelling its tools as “made in Germany” when the tools were really made in China. By misrepresenting the origin of the tools, King Kong avoided paying a 25% tariff.

This case began when a competitor of King Kong filed a whistleblower complaint alleging that King Kong was manufacturing cutting tools in a Chinese factory (U.S. ex rel. China Pacificarbide, Inc. v. King Kong Tools, LLC, et al., N.D. Ga). The tools were then shipped to Germany, where additional processing was performed on some (but not all) of the tools. The tools were then shipped to the United States and declared to be “German” products. (https://www.justice.gov/usao-ndga/pr/king-kong-tools-settles-claims-customs-fraud-19-million).

Criminal Case

Kenneth Fleming and Akua Mosaics, Inc. (Akua Mosaics)

Kenneth Fleming and Akua Mosaics, Inc. (“Akua Mosaics”) plead guilty to a conspiracy to smuggle goods into the United States under 18 U.S.C. §§371 and 545. According to the plea agreements, from 2021 through June 2022, the defendants conspired to defraud the United States by smuggling and importing porcelain mosaic tiles manufactured in China, by falsely representing to the CBP that the merchandise was of Malaysian origin. This was done with the intent to avoid paying antidumping duties of approximately 330.69%, countervailing duties of approximately 358.81%, and other duties of approximately 25%. 

Fleming and Akua Mosaics conspired with Shuyi Mo, a citizen and resident of PRC who was arrested when he was attempting to flee the United States. They caused “Made in Malaysia” labels to be placed on boxes containing tiles manufactured in China and then caused a container with tiles manufactured in China to be shipped from Malaysia to Puerto Rico, misrepresenting the country of origin as Malaysia. The amount of unpaid duties and tariffs on this shipment was approximately $1,090,000. At sentencing, Fleming was ordered to pay restitution of $1,040,000 and was sentenced to two years of probation. (https://www.justice.gov/usao-pr/pr/akua-mosaics-inc-and-its-president-plead-guilty-conspiracy-smuggle-goods-united-states).

Takeaways

Based upon anticipated tariff increases, it is recommended that corporations who import products work with experienced trade counsel to determine if they are following the law. Companies should heed trade counsel’s advice if they do retain them, or they could end up in a situation like International Vitamin Corporation discussed above. 

Companies should ensure that they have the resources and training for employees working in jobs related to customs. Even simple errors and omissions could have more significant monetary consequences with increased tariffs. Companies should also ensure that they have robust compliance programs.

Companies should also be proactive in retaining counsel with expertise in this area if they have any indication that they may be involved in a criminal or civil investigation. Regardless of whether they dispute or settle the matter, experienced counsel is key in reaching a favorable resolution. As discussed above, Alexis LLC was able to do so according to the Government’s press release. 

Finally, companies should be diligent in their employment law practices. That means not only complying with the law, but also making sure that personnel files are appropriately documented when there are employee issues. Based on many FCA cases in which the Wirskye Law Firm has represented clients, the relators have always been a competitor or a former disgruntled employee who was terminated for performance issues. However, the employee’s employment files often do not reflect their poor performance which can challenge the entity in defending whistleblower claims. 

Other articles from Sarah Wirskye