US Customs – Fool Me Once or Not at All? Understanding Customs Fraud, Penalties and what not to do.

When cargo enters the US, there are a list of “standard” fees that must be paid to US Customs, such as duty, HMF, MPF, etc. Paying invoices for these fees is part of daily business practice for many importers. Outside of these charges, less common, but impactful Customs penalties can be issued. Many companies are not as familiar with these penalties, how and when they occur, and what steps should be taken to avoid them. One news headline provides a good example of how severe penalties can be issued to individuals or companies in cases of gross negligence or fraud. 

“Clothing Wholesaler Owner Sentenced to 12 Months in Prison for Customs Violations”– is a headline from the end of last year. ‘Ambiance’, a California apparel company, submitted fraudulent invoices to CBP that undervalued its clothing shipments from Asia. As charged by the U.S. Attorney’s Office, the importer’s Asian manufacturers produced two invoices for the clothing orders, one at 60% to 70% of the shipment’s actual value and one with the actual value. This scheme allowed Ambiance to undervalue their imports by about $82.6 million and avoid over $17.1 million in tariffs. In addition, the U.S. Attorney’s Office for the Central District of California sentenced Ambiance owner, Sang Bum Noh, twelve months and one day in federal prison for conspiring to undervalue imported garments and skirting millions in import duties. Noh also failed to report millions of dollars in income on tax returns and failed to report large cash transactions according to the U.S. Attorney’s Office. Prosecutors said that Noh made “defrauding the United States a significant revenue stream for Ambiance, appropriating approximately $35,227,855.45 from U.S. Customs and Border Protection and the Internal Revenue Service in less than four years.” 

What lessons can be learned from this highly visible case? 

Make sure you know and trust your suppliers.  

It is more important than ever to work only with trusted partners. Those who operate with full transparency. Ones that have international trade certifications and/or CTPAT status are even better. Vendor and partner vetting are tasks that many companies do not think about or conduct thoroughly. It is important not to base decisions solely on who offers the best cost and turnaround time. While both are important considerations, vetting must be done to make certain that any company you partner with has not been flagged by Customs or other authorities, as well as to have full understanding of the financial transaction with the supplier from end to end - including product valuation.  

Know your responsibilities as an IOR – importer of record.  

Conduct regular reviews to make sure all your shipment documentation (commercial invoice, packing list, ISF data, etc.) is complete, clear, concise, and most importantly, accurate. Maintain sound record keeping practices – know what documents to keep and for how long and make sure they can be easily retrieved. US Customs states “the importer of record is responsible for using reasonable care to enter, classify and value imported merchandise, and provide any other information necessary to enable Customs to properly assess duties, collect accurate statistics and determine whether any other applicable legal requirement is met.”   

Understand how your product is valued 

One of CBP’s priorities is to ensure controls are in place to protect duties and taxes it is responsible for collecting on behalf of the US government. Ensuring that imports are properly valued is a key component of protecting revenue because duties and fees are often based on the declared value at time of entry. Undervaluing an import transaction results in less revenue collected by Customs.  

In the Ambiance case, both the supplier and importer conspired to submit fraudulent invoices to CBP that undervalued the clothing shipments from Asia. Declaring the value of the imported goods is critical to the customs entry process. The negligent or deliberate use of an incorrect basis of valuation, or the omission of additional payments can result in the assessment of increased duties and the imposition of penalties against the importer. Whether or not there has been an actual duty loss can also affect a penalty assessment against the importer.  

For more information on Customs valuation, be sure to check out CBP’s informed compliance publication What Every Member of the Trade Community Should Know About: Customs Value  And be sure to consult with a knowledgeable Customs Broker. 

How does CBP define negligence, gross negligence and fraud and what types of penalties can they assess? 

Customs provides for three levels of importer culpability: 

• Negligence (carelessness) 
• Gross Negligence (deliberate disregard) 
• Fraud (intentional deceit) 

Customs has statutory authority to assess civil monetary penalties on importers, brokers, carriers, and any other “person” who violates the customs laws and regulations by making a materially false statement or omission with respect to the entry or attempted entry of merchandise into the United States.  

Under separate statutory authority, Customs can assess a civil penalty against any person who assisted or was “concerned with” the importation of merchandise contrary to law. 

Civil penalties can range from two to four times the loss of revenue for negligence or gross negligence cases, and up to the domestic value of the goods in cases where fraud is alleged.  Penalties for non-revenue loss violations can range from 20 to 40 percent of the value of the merchandise for negligence or gross negligence cases, and up to the domestic value of the goods in cases where fraud is alleged. 

Depending on the circumstances and type of penalty, civil penalties can range from 20% to 100% of the value of the goods. It is possible that Customs’ civil penalty investigations can also lead to criminal investigations, such as the case with Ambiance and owner Sang Bum Noh. Finally, it is important to take into consideration that customs has the ability to assess culpability and levy both civil and criminal penalties to organizations (businesses) and individuals. 

What now?  

Armed with this initial information, what should importers do now? What steps should be taken to avoid exposure to costly Customs penalties and fines? Acting sooner than later is always a good approach on when to review your current import and customs compliance processes.  

Here's an example of five six requirements that you may not be aware of to get the conversation started within your own organization: 

1. Marking: CBP’s Country of Origin marking requirements require tracking all the way back to each raw material and input which make up your ultimate, finished product  
2. Valuation: There are many aspects of supply chain transactions which can impact a product’s valuation and what must be declared on the commercial invoice. For example, all buying and selling commissions, assists (such as moldings, designs, patents), intellectual property rights, and much more.  This is often a much more complicated calculation than many importers realize. 
3. Data Responsibility: The US Importer of record is ultimately responsible for anything transmitted on their behalf to CBP, so it is crucial for importers to have visibility to exactly what their Customs Broker has submitted by obtaining and reviewing copies of each Customs Form 7501. 
4. Other Government Agencies: FDA reporting requirements are applicable to many more products than companies may realize, and FDA’s Foreign Supplier Verification Program (FSVP) for food imports has been catching many companies off guard with how complex the requirements are. A good example of an unexpected OGA requirement is pesticide reporting on some types of hand sanitizer. These are just a couple of hurdles importers may not realize they will face. 
5. Permits, Licenses, and Sanctions: There are a surprising number of goods which require special permits to import into the US – and the list is ever changing. Sanctions and various types of tariffs are also hot topics right now. 
6. Error Reporting: If any entry, classification, or reporting errors are found, the Importer is responsible for working with their Customs Broker to correct these errors as far back as they possibly can AND file a prior disclosure with US Customs informing them of the error and the associated corrections. 

This quick list is by no means all encompassing. Depending on your business, the products you are importing and origin sourcing locations there may be many more specific requirements to be aware of.  As part of your internal review, we recommend working in partnership with your Customs Broker or Customs Attorney. 

If any of these requirements surprised you or you would like to learn more please contact Ashley Coxey, National Director of Business Development, Customs Brokerage or any member of our expert Customs Compliance team at compliance@laufer.com.