U.S. Government Announces One of Its Largest Customs Fraud Settlements
The Department of Justice last week announced a $22.8 million settlement involving customs duty fraud—one of the largest False Claims Act settlements involving customs duties to date. A former company employee reported the alleged violations against German multinational chemical and gas company, Linde AG, and its American subsidiary, Linde Engineering North America, Inc. (collectively, “Linde”). The whistleblower, who will receive $3.78 million for reporting the alleged violations, alleged that Linde fraudulently evaded customs duties by falsifying invoices and incorrectly describing imports in customs documents, both in terms of the characteristics of the imported products and their cost.
Importers are obligated to provide U.S. Customs and Border Protection with accurate reporting information, which allows the government to assess duties properly on U.S. imports. Under the False Claims Act (FCA), any knowing failure to accurately report or pay the full amount of customs duties is a violation of the law. A company that knowingly evades customs duties risks liability under the FCA, potentially resulting in treble damages and penalties. FCA is a powerful and essential tool used to combat fraud against the government, including customs and duties fraud, which is the second-largest source of federal revenue collected by the U.S. Government after taxes.
The complaint alleges that Linde misclassified its imported pipe products under the wrong Harmonized Tariff Schedule (“HTS”) codes to decrease or avoid paying antidumping and countervailing (“AD/CV”) duties. Goods imported into the U.S. are classified by numerical HTS codes tied to specific customs duty rates, including AD/CV duties when applicable. AD/CV duties protect American manufacturers and industries from unfair trade practices, specifically “dumping” of imports into the U.S. market for less than market value. The duties also protect import subsidies by foreign governments, which benefit importers at the expense of U.S. manufacturers. Importers must accurately identify the HTS codes and the amount of AD/CV duties owed in its customs entry documents, including the summary customs, Form 7501, submitted with every import. An FCA violation occurs when an importer knowingly breaks these rules.
The complaint alleges that Linde also understated the value of its imported goods by failing to disclose to the government “assists”—costs that add value to imported goods not reflected in the price paid to the invoicing vendor. In one instance, Linde purchased and shipped raw material to overseas vendors, who manufactured and assembled the product for importation into the U.S. Linde then imported the completed assembled product without including the cost of the foreign raw materials in entry forms or invoices submitted to U.S. Customs. The value of imported goods determines the duties; any knowing undervaluation of imports is a False Claim Act violation. The value of imported goods, including any assists, also must be identified in Form 7501.
The complaint alleged that Linde paid 50 percent less in import duties than similar companies, even while Linde moved its American manufacturing operations overseas and increased its imports from $750,000 to $268 million in four years. Under FCA, a person who reports fraud against the government (a whistleblower) resulting in a qui tam lawsuit that recovers money owed to the government is entitled to an award of between 15% and 30% of the amount recovered. These awards are a strong incentive to encourage those with knowledge of fraud on the U.S. Government to come forward. Although insiders typically bring cases under the False Claims Act, cases involving customs fraud have been brought by non-insiders, including competitors, who are often well-positioned to identify fraudulent customs practices.