Misconception of Customs Fraud and Importer of Record

Introduction
A common belief in the international trade world is that, when products are imported into the United States, only the importer of record (the “IOR”) is on the hook for customs duties. And, accordingly, that a company can insulate itself from liability for duties if it simply doesn’t act as the IOR. This misconception has led to the recent proliferation of “delivered duty paid,” or DDP transactions, which have become more common as more products from more countries have become subject to higher tariffs. I’m an attorney who represents relators in qui tam cases under the False Claims Act, and I’m here to tell you that this common belief, and the reliance on DDP transactions that flows from it, is wrong.

Unpacking The Jargon
That introductory paragraph had some jargon in it, so let’s do some unpacking. First, what is an “importer or record” or IOR? When products are imported into the United States, someone needs to file a document called an Entry Summary (a CBP Form 7501). One of the fields in the Entry Summary is called “Importer of Record,” and the instructions to the Entry Summary explain that the IOR is “the individual or firm liable for payment of all duties.” By statute, the IOR must be the owner, purchaser, or ultimate consignee of the products being imported, or a customs broker or other designated agent of one of those participants in the transaction. 19 U.S.C. § 1484.

Second, what does “delivered duty paid,” or DDP, mean? International transactions for the sale of goods are often subject to “Incoterms,” a set of rules issued by the International Chamber of Commerce defining the responsibilities of sellers and buyers. One of those Incoterms is DDP, “delivered duty paid.” When a transaction is subject to the DDP Incoterm, the seller is responsible for payment of all import duties and for handling customs clearance, and the buyer receives title after the goods clear customs. DDP is merely a private agreement between buyer and seller as to how they allocate the risks and burdens of the transaction. Incoterms are not binding on the government, which remains free to collect duties from any party liable for those duties under the law (including the False Claims Act).

What is a qui tam case? The False Claims Act makes it illegal to commit various types of financial frauds on the government, including customs fraud. The False Claims Act also authorizes qui tam cases, which are lawsuits filed by private parties, but in the name of the government. In the customs and tariffs context, this means that a private party—which can be either an individual or a business entity—files the lawsuit, but seeks to recover the duties owed to the government. The statute provides for treble damages (for example, if the unpaid duties are $1 million, the government can recover $3 million in damages) plus additional penalties. And the person or business that brings the case (called the “relator”) is entitled to an award of between 15% and 30% of the amount recovered for the government.

A Company That Is Not The Importer Of Record May Still Be Liable For Duties
A hypothetical set of facts will help me illustrate this issue. A company called Ostrich Head Inc. (my apologies if this is the actual name of any actual company!) wants to import a large quantity of plastic ostrich eggs into the United States so that it can sell those plastic eggs to its egg-loving customers. Ostrich Head finds a vendor of plastic eggs that has a plastic egg factory in China. Let’s call that company Anything For A Buck Ltd. Now, it turns out that plastic ostrich eggs are subject to a 35% tariff when imported into the United States. Ostrich Head would rather not incur that extra 35% cost, so it asks Anything For A Buck whether there is a “work around.” Anything For A Buck offers a brilliant idea: they’ll do a DDP transaction, which means that Anything For A Buck will be responsible for importing the ostrich eggs, filing the Entry Summary, and paying any duties. Ostrich Head asks the obvious question: “How will that save us money? Won’t you just pass the extra 35% onto us?” Anything For A Buck responds: “Nah, don’t worry about that. We have ways of not paying the full 35%. And besides, since we’re doing this DDP, it won’t be your problem!” Ostrich Head says “ok, we won’t ask any more questions” and places its order for 20,000 plastic ostrich eggs. A few weeks later, the 20,000 eggs show up at Ostrich Head’s warehouse, and Ostrich Head sends its payment to Anything For A Buck.

You see why I called the company Ostrich Head, right?

Ostrich Head could have been the IOR, since it was both the purchaser and ultimate consignee of the plastic eggs. But since this was a DDP transaction, Ostrich Head did not file the Entry Summary. Instead, the Entry Summary was filed by Anything For A Buck, and so, technically, Anything For A Buck was the IOR.

But this does not mean that Ostrich Head is actually off the hook for the customs fraud that was likely committed by Anything For A Buck. The government—or a qui tam relator acting for the government—could still sue Ostrich Head under the False Claims Act, seeking treble damages and penalties. That lawsuit could be based on three different theories of liability.

First, under the False Claims Act, a defendant can be liable not only for its own, direct violations, but also for “causing” someone else’s violations. Thus, the False Claim Act lawsuit could allege that, by purchasing the Chinese-made plastic eggs on a DDP basis while also knowing that Anything For A Buck was likely to engage in customs fraud, Ostrich Head “caused” Anything For A Buck’s violations.

Second, the False Claims Act includes a “conspiracy” cause of action. This means that if two companies agree to jointly engage in a transaction that violates the False Claims Act, then each is separately liable for the other’s violations. Like the “causing” theory, a “conspiracy” theory could make Ostrich Head liable for the fraud engaged in by Anything For A Buck because, by purchasing the eggs on a DDP basis while also suspecting that Anything For A Buck would engage in fraud, Ostrich Head effectively “agreed” to participate in a fraud scheme. This is what conspiracy means.

Finally, because Ostrich Head was the purchaser and ultimate consignee of the plastic ostrich eggs, it could have been the IOR. And because it qualified as an IOR, the government may well take the position that it remained obligated to assure that all duties were paid, even if it didn’t technically act as the IOR by filing the Entry Summary. And if Ostrich Head “knew” that the fraud would occur—and under the False Claims Act, “suspecting” and “knowing” are often the same thing—Ostrich Head might itself be directly liable for any unpaid duties.

I know what some of you may be thinking. “This guy represents qui tam relators in these types of cases, so he’s biased, and might just be making all of this up.” I applaud your skepticism.

Would it change your mind if the United States Department of Justice was on record endorsing precisely these three theories? Because it is.

In a complaint that the Department of Justice filed in a case that is currently in active litigation, these are precisely the three theories relied upon by the government. And the facts of that case are a close variation on my Ostrich Head hypothetical. That case is titled United States ex rel. Lee v. Barco Uniforms, Inc., and arises out of the importation of licensed uniforms (for example, the type worn by employees of chain restaurants) that were made in China, and then imported into the United States on a DDP basis. In its complaint, the government alleges that the U.S.-based purchaser was on notice that, in connection with those DDP transactions, the seller would likely be engaging in customs fraud as a way to keep prices down. The U.S.-based purchaser is alleged to have gone along with that scheme as a way to make its own prices more competitive when bidding on contracts to supply those licensed uniforms to various large corporate customers. And the government alleges that the U.S.-based purchaser is liable under the False Claims Act because: (1) while it wasn’t the designated IOR for the DDP transactions, it could have been; (2) it “caused” the alleged customs fraud; and (3) it “conspired” with the seller to engage in that alleged customs fraud.

Who are you going to believe? Me or the Department of Justice? Well, in this case, either will suffice because we’re in complete agreement on this key point: a company that is not the importer of record can still be liable for customs fraud under the False Claims Act.