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Customs Duty Fraud Explained
Wednesday, July 19, 2023

Goods bought in another country and transported across international borders are subject to taxes or tariffs. These additional charges are called customs duties, and the rates of what you can expect to pay may vary depending on what the object is, how much of it you are bringing in with you, and where it comes from.

Customs duty fraud happens whenever someone attempts to avoid paying the tax that is owed on the imported good. They may try to avoid declaring the goods upon entry to the country, or attempt to underpay or undervalue what they are bringing in. Either way, customs fraud is one area of white-collar crime that whistleblower attorneys are trained to handle. If you know something about customs duty avoidance, you may be able to report fraud to a whistleblower lawyer for a reward.

What is a Customs Duty?

Customs duties are in place to protect the sovereignty of each individual country. Countries may try to limit the exchange of certain kinds of goods by imposing specific taxes or duties on their import. This tax does not mean you cannot bring something across borders, but instead works to create a functional limit on the flow of certain goods. This can benefit each country's manufacturers, economy, and environmental health.

When Do Customs Duties Apply?

Any time goods cross an international border, the importer must declare them. The duty rate is typically a percentage set by each government, traditionally between 0% to 30-40% of the object's value. Duties are set by international trade agreements and can vary greatly based on the country of origin as well as national interests. Online transactions are subject to customs duties just like international travel is.

Which Goods Are Exempted from Customs Duty?

Some imported goods into the U.S. may qualify for a personal exemption. These items are meant to be used personally by the importer or by others in their household. They must still be declared to US Customs, and the importer must not have previously used or exceeded their exemption allowance in the last 30 days. In order to qualify for a personal exemption, the goods must also be physically with the importer while they travel or shipped later only from the US Virgin Islands or Guam. Depending on where you are traveling from, you may have $200, $800, or $1,600 available in duty free exemption.

In general, household goods may be imported duty free if they are for personal use only and have been in possession of them for at least one year. Some examples include furniture, carpets, linens, and paintings.

There are limits on what objects may qualify for personal exemption, such as certain amounts of alcohol and tobacco products. Additionally, some personal objects, like clothing, jewelry, cameras, and more may be dutiable, although the duty may be waived if you have had them for longer than one year.

How Are Customs Duty Fees Calculated?

The amount you owe in customs duty fee is not based on the object's weight, height, or even quality of the good. Instead, customs duties are calculated on a percentage basis according to the object's total purchased value, as paid in the country of origin. The rate you pay in custom duty fees will be calculated based on the Harmonized Tariff Schedule (HTS), which is a reference manual used by US Customs and Border Protection.

While calculating customs duty rates may seem complex, doing so is actually a simple formula. To find out how much duty you can expect to pay on an object, simply identify the good's 10 digit HTS code. The HTS code is based on the object's specific characteristics, and is a fixed number. From there, you can calculate the total duty cost you can expect to pay. Add the good's value to any applicable shipping and insurance costs. Then multiply this number by the duty rate from your HTS code. The result is your expected total duty amount per import.

Is Import Tax the Same as Customs Duty?

While most, if not all, imports are subject to customs duties, not all imports have tariffs applied. An import tax is a percentage fee charged by the government on incoming goods. A tariff, however, is a specific and additional charge levied on certain goods in order to disincentivize their flow across borders. Tariffs are usually in place to protect certain national industries. Say that the United States wants to protect its steel production and is facing pressure from the industry to incentivize American-made steel. One way of doing so would be to levy a higher tariff on international steel imports.

What Can Impact Customs Duty Rates?

Customs duty rates are set based on a number of factors. Certain key details when calculating customs duty rates include:

  1. Where the object was manufactured

  2. What the object is made of

  3. Where the importer acquired the object

Because customs duties can vary depending on international trade agreements, where the object was manufactured can have just as much value as where it was acquired. For instance, certain sub-Saharan African countries are currently considered duty-free exporters to the United States under the African Growth and Opportunity Act. An object purchased in one of these countries may be subject to lower import taxes if it comes with a certificate of origin.

Other important factors that can affect US customs duty rates are:

  • Free Trade: Preferential rates are currently available for imports from countries with Free Trade agreements.

  • Developing economies: Duty rates have been reduced or are free in order to stimulate trade between the United States and certain developing economies. The Generalised System of Preferences (GSP) is a guide for which countries are given preferential treatment when calculating customs duty tax. Some Caribbean, Andean, and African countries are subject to less import tax than others.

  • NAFTA: The North American Free Trade Agreement, commonly known as NAFTA, lowered rates of exchange between the US, Mexico, and Canada.

  • International relations: The Trump Administration raised import tariffs on Chinese manufactured goods in an effort to disincentivize trade between the two countries. In addition, there are certain longstanding heightened duties on some goods purchased in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the Ukraine.'

What is Customs Duty Fraud?

Examples of customs duty fraud include:

  • Failing to declare imported goods to avoid payment of duties

  • Misclassifying the country of origin to receive a favorable duty rate

  • Transshipping, or deliberately shipping goods to a secondary country and then claiming that layover as the country of origin so as to avoid paying proper duties

  • Falsely describing the imported good or misidentifying its HTS code in order to lower duties

Do Undervalued Goods Constitute Customs Fraud?

Undervaluing goods is a common kind of customs fraud. Each good has its own unique HTS code, which is partially assigned based on its material. For instance, a leather wallet has a higher value than one made of cloth. Undervaluing an imported good to lower customs duties owed cheats the government out of the appropriate share of revenue.

How to Report Customs Fraud

It is incredibly difficult for the US government to catch customs fraud on its own. Customs fraud detection and enforcement often relies on honesty and brave whistleblowers speaking up.

In order to report customs fraud, the first step is contacting a whistleblower attorney. A qui tam law firm can ensure that the proper steps are followed for customs fraud reporting, and that an investigation is opened. They can also protect your anonymity as well as your whistleblower reward in exchange for your information.

False Claims Act and Customs Fraud Investigations

After a whistleblower speaks up under the False Claims Act, customs fraud investigations will be overseen by a combination of agents from U.S. Immigration and Customs Enforcement (ICE) Homeland Security Investigations (HSI) as well as by U.S. Customs and Border Protection (CBP). Depending on the kind of US customs duty fraud a whistleblower has alleged, the investigation may fall under the purview of the Health and Safety Program, focusing on the importation of pharmaceuticals and hazardous chemicals; the Textile Program focusing on false invoicing, false claims of origin, misclassification and smuggling; the Anti-Dumping and Countervailing Duties Program helping domestic manufacturers compete against foreign suppliers; the Forced Child Labor Program; Environmental Crimes Program; or a similar division.

Customs Fraud Penalties

In a successful qui tam claim, a customs fraud lawyer may be able to recover anywhere from 15 to 30% of the overall settlement for their client. The whistleblower's percentage is based on the value of their information in relation to the total recovery. Under the False Claims Act, treble damages may be assessed per violation. In US customs fraud cases, this means that the government may be able to recover up to three times the unpaid duties per import.

Importance of Reporting Customs Fraud

A customs fraud whistleblower can earn themselves a substantial financial reward with the help of a qui tam attorney. When reporting customs duty fraud to a whistleblower law firm, you can protect your own anonymity while filing under the False Claims Act to recover missing government funds. You can also protect American industry and help ensure that trade agreements are being appropriately enforced. Reporting can reveal child labor violations, environmental impact concerns, and other hidden negatives hidden behind misreported or undeclared international goods. When it comes to reporting customs fraud, speaking up is the right thing to do.

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