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Customs Misclassification Case Settled for $3.1M

iStock-840821654-300x168The False Claims Act whistleblower received a $600k reward.

An importer has paid $3.1 million to settle a whistleblower lawsuit alleging it misclassified hazardous chemicals from China to evade more than $1 million in customs duties.

The whistleblower, a former employee of importer Penta International, will receive $600,000—or nearly 20% of the recovery—as a whistleblower reward under the qui tam provisions of the False Claims Act, according to the U.S. Department of Justice, which intervened in the case.

Penta’s owner also pleaded guilty to wire fraud in a related federal criminal probe.

HTSUS misclassification

According to the Justice Department, Penta allegedly conspired with Chinese suppliers to mislabel highly toxic chemicals it imported as relatively safe essential oils.  This made it possible for Penta to allegedly fraudulently import the goods under the wrong Harmonized Tariff Schedule of the United States, or HTSUS, classifications, thereby evading over $1 million in the higher import-duty rates to which the hazardous substances were subject.

The whistleblower, a former Penta logistics employee, became aware of the alleged scheme from his employment, and initiated the whistleblower lawsuit by filing a qui tam lawsuit under the False Claims Act.

According to the whistleblower’s complaint, Penta’s owner allegedly created a cross-referencing document for the firm’s warehouse staff to properly identify the substances and correctly fulfill customer orders despite the mislabeling.

Mislabeling hazardous substances can pose serious health risks to individuals involved in the shipping process.

Import-misclassification schemes like Penta’s are thought to be common, especially with respect to goods from China, which are subject to particularly high tariffs of up to 25% under Section 301 as well as regular import duties.

Customs fraud whistleblower cases

Customs fraud violates the False Claims Act, a federal statute under which parties that defraud the federal government can be held liable for substantial damages and penalties.  Private individuals known as qui tam relators or whistleblowers have the right to initiate cases on the government’s behalf under the False Claims Act, with the Justice Department entitled to intervene and take over the prosecution of the case.

Whistleblowers are generally paid 15%-30% of any recovery as a whistleblower reward.

Customs fraud is believed to be rampant, costing taxpayers billions of dollars a year and disadvantaging law-abiding business competitors.

While the Penta case involved the misclassification of imports, customs fraud can also various forms, including the misdeclaration of imports’ country of origin, or COO, or the underdeclaration of imports’ value.  Undervaluation frauds–the most common type of customs fraud–typically involve the filing of fake or altered commercial invoices with U.S. Customs and Border Protection, or CBP, when goods are entered through customs.

The government relies heavily on qui tam whistleblowers to help it police customs fraud, which is otherwise very difficult for the government to detect.

Contact a customs-fraud whistleblower attorney

If you know of an importer cheating on its customs duties, it is vital to speak with an experienced customs-fraud whistleblower attorney to fully understand your rights as a potential whistleblower under the False Claims Act.  Reach out to customs-fraud whistleblower attorney Mark A. Strauss for a free consultation.  All communications with Mr. Strauss are attorney-client privileged and confidential.

Notably, simply reporting a fraud to the government through a tip-line will not entitle you to a False Claims Act whistleblower reward.  To recover one, you must file a False Claims Act lawsuit and be represented by an attorney.