The Whistleblower & Anti-Fraud Blog
Samsung C&T America allegedly declared incorrect HTS tariff classifications on its customs entry documents.
A U.S. unit of the Sou
th Korean conglomerate Samsung (KSE: KRX:028260.KS) has agreed to pay $1 million to settle allegations it violated the False Claims Act by knowingly misclassifying imports to evade customs duties.
According to the U.S. Department of Justice, Samsung C&T America knowingly filed customs entry documents misdescribing and listing inaccurate U.S. Harmonized Tariff Schedule classification codes for footwear it imported from China and Vietnam.
The company allegedly used HTS codes for shoes made of mostly-rubber or plastic for which the applicable duty rate is only 6%.
However, the shoes were constructed using “foxing”—a rubber strip securing the upper and outsole. They were thus ineligible for that duty-rate classification. Instead, they were subject to a different HTS classification code carrying a duty rate of 20% plus ninety cents a pair, according to the Justice Department’s False Claims Act complaint.
The fraud was uncovered by an employee of a New York footwear design firm which partnered with SCTA to develop and market the imported footwear. She filed a qui tam whistleblower lawsuit against SCTA under the False Claims Act, in which the government, after an investigation, intervened. She reportedly will receive a whistleblower award of $210,000.
False commercial invoices and entry summaries
In its complaint, the Justice Department alleged that SCTA’s customs broker “repeatedly” advised it that using the HTS classification code for mostly-rubber or plastic shoes was improper for footwear constructed with foxing. SCTA, however, ignored that guidance.
Instead, the company falsely assured the broker that its footwear was not made with foxing and provided it with doctored commercial invoices containing inaccurate descriptions of its shipments, the Justice Department alleged.
That false information was then included in the Form 7501 customs entry summaries the broker filed on SCTA’s behalf with U.S. Customs and Border Protection. The allegedly erroneous invoices were also submitted.
As a result, SCTA significantly underpaid duties owed CBP, the Justice Department alleged. In one instance, SCTA allegedly was able to fraudulently slash the duties it owed on a shipment by more than two-thirds, from $27,699.50 to $8,348.44.
Customs fraud and the False Claims Act
Cheating on customs duties is a serious offense and violates the False Claims Act, which imposes substantial liabilities on parties that knowingly overcharge or underpay the U.S. government or its agencies. Under the statute’s qui tam provisions, private parties known as relators or whistleblowers are authorized to commence lawsuits on the government’s behalf and share in the proceeds.
Generally, False Claims Act whistleblowers receive 15-30% of the recovery as a reward.
Import duties and tariffs are the U.S. government’s largest sources of revenue after personal and corporate income taxes. As a result, cracking down on customs fraud is a top priority of the Justice Department.
Customs frauds generally fall in three categories—undervaluation, misclassification, and country-of-origin fraud. The SCTA matter illustrates the use of improper HTS classifications.
Country-of-origin frauds generally involve the “transshipment” of goods through third countries before being entered in the United States. Fraudsters falsely declare the third country as the COO on customs entry documents.
Undervaluation cases typically involve the use of inaccurate sales prices on customs entry documents and commercial invoices.
Potential False Claims Act whistleblowers should be alert to customs frauds, which are thought to be on the rise, especially for goods made in China. The United States has imposed additional tariffs of up to 25% on a broad swath of Chinese goods under Section 301. Many companies are understood to be attempting to circumvent those tariffs by fraudulent means.
Customs fraud not only improperly burdens American taxpayers but constitutes unfair competition, harming against law-abiding importers who are entitled to a level playing field.
Because CBP lacks the resources to check or audit more than a small number of shipments itself, the U.S. government relies heavily on whistleblowers to detect and report instances of customs fraud.
Customs-fraud whistleblowers can reside outside the United States and do not have to be U.S. citizens. They frequently work in the fields of logistics, sourcing, finance, or procurement.
Confer with a customs fraud whistleblower attorney
If you know of an importer engaging in customs fraud or otherwise defrauding the federal government or one of its agencies, it is vital to speak with an experienced whistleblower attorney about your rights under the False Claims Act. Reach out to customs fraud whistleblower attorney Mark A. Strauss for a confidential and free consultation. All communications are protected by the attorney-client privilege.
To be eligible for a whistleblower reward, you must file a qui tam lawsuit. Merely reporting misconduct to a government hotline, complaint portal, or agency is not sufficient.