Fish lovers delight in freshness. Delectable, pure and savory. However, wait three days and raw fish assaults the senses and quickly clears the room.
When John B. King, CFE, was supervisory criminal investigator for U.S. Immigration and Customs Enforcement in Newark, N.J., he metaphorically caught some putrid aromas when Sterling Seafood Corporation was trying to import shipments of purported Vietnamese grouper. “Our import specialists realized that grouper isn’t a native fish of Vietnam,” he says. “So, we pulled the fish and had it chemically tested.” The shipments were “Pagasius hypophthalmus,” sometimes referred to as Vietnamese catfish. Thomas George, CEO of Seafood Corporation, based in Cresskill, N.J., was trying to evade more than $60 million in federal tariffs by falsely labeling his shipments as cheaper fish.
At the time, the U.S. Department of Justice (DOJ) had established tariffs on all imports of Vietnamese catfish into the U.S. because the Southeast Asian country was marketing the fish at a significantly lower price than the market rate. The initial U.S. “anti-dumping” order, which protected catfish farmers in Louisiana, imposed a duty of 63.88%, according to the DOJ, which the U.S. adjusted based on market conditions.
George admitted that for two years he’d agreed with a Vietnamese distribution company to engage in a scheme to falsify the identity of the catfish as grouper, which wasn’t subject to anti-dumping duties, to evade tariffs. He was sentenced to 22 months in prison and fined more than $64 million. King says that George was also “transshipping” the catfish from Vietnam to Thailand and then into the U.S. to take advantage of much lower tariffs.
Though the perpetrator committed this fraud in the early 2000s, it’s indicative of growing tariff or customs fraud in the wake of fluctuating U.S. tariff policies. “As tariffs increase, the incentives to cheat also go up, particularly where the tariffs vary a great deal country to country and product to product. Then the ways in which an importer can cheat become much more lucrative,” whistleblower and qui tam attorney Jonathan Tycko, J.D., partner at Tycko & Zavareei in Washington, D.C., tells Fraud Magazine. Tycko says his firm has seen an increase in clients reporting customs fraud committed by importers to the U.S.
“Even before these extra tariffs, the Chinese government has already said they were setting up new companies within Vietnam to make ‘transshipments’ — shipping their products from another country to avoid higher tariffs,” says King, who’s now vice president and threat consultant for Barclay’s PLC of London, England.
According to CNBC and Reuters, Vietnam’s trade ministry has issued a directive to deter illegal transshipment of goods to the U.S. and other trading partners as it tries to avoid steep U.S. tariffs. The Vietnam ministry said growing tension caused by U.S. tariffs would make it “more complicated to avoid sanctions that countries will apply to imported goods” if fraud isn’t prevented. Vietnam imports 40% of its goods from China and, according to the article, “Washington has openly accused Beijing of using the Southeast Asian nation as a transshipment hub to dodge U.S. duties.”
Increased tariffs on a vast array of U.S. imports is raising the risk of customs fraud among all segments of the freight transportation supply chain, according to the publication Freight Waves. “Any time there are trade disruptions, the fraudsters may prey on the vulnerabilities of the rapid change and take advantage of the situation,” says Kirti Reddy in the article. She’s a partner with the law firm Quarles & Brady and a former assistant U.S. attorney for the Southern District of New York.
And in a tangent fraud wrinkle, The New York Times reports that shipping companies, many of them based in China, have reached out to U.S. firms that import goods with emails that contain such fraudulent messages as “We can avoid high duties from China, which we have already done many in the past” and “Beat U.S. Tariffs at a flat 10%. You ship worry free.” However, these worries aren’t free. They’re costly.
A country will impose a tariff, or tax, on the goods and services imported from another country to influence it, raise revenues or protect competitive advantages. The word can be traced back to Latin as well as the Arabic word "taʽrīf," meaning "notification" or "inventory." Merriam-Webster dates the first known use of "tariff" to 1592, but most countries have imposed taxes on incoming goods from the beginning of trading. And companies have been committing tariff, or customs, fraud since the first imported shipments.
Tycko tells Fraud Magazine that the amount of duties a company owes on an imported product into any country is based on three variables: 1) the products imported, 2) the country of origin and 3) the value of the product. “An importer, of course, can lie about any of these three things, and many of the ones who are willing to cheat will lie about all three,” he says.
Almost every country has a customs agency responsible for overseeing imports through ports of call, collecting tariffs and detecting potential fraud. The International Centre for Trade Transparency and Monitoring assists customs agencies to increase efficiency and reduce risks.
However, because of the current volatility of U.S. tariffs, many are focused on the efforts of the U.S. Customs and Border Protection (CBP). Originally known as the U.S. Customs Service, established in 1789, the agency became the CBP on March 1, 2003, in the wake of 9/11.
According to the Whistleblower Law Collaborative, fraudsters can select from a broad menu of tasty ways to commit tariff and customs fraud:
Routing a shipment through a third country to disguise its origin.
Falsifying a shipment’s declared value or quality.
Falsely classifying merchandise under the U.S. Harmonized Tariff Schedule.
Splitting a shipment into multiple shipments.
Other criminal methods include failing to declare the value of “assists” (goods or services provided by the buyer to the seller, like tooling or engineering), which should be included in the dutiable value; smuggling; and counterfeiting.
According to the Whistleblower Law Collaborative, CBP officials can inspect only a small fraction of the goods that enter the country each day. Homeland Security says in its 2021 study that the U.S. had 79,000 unpaid customs duties to collect, totaling $5.4 billion.
In the U.S., customs evasion violates the U.S. False Claims Act (FCA), a Civil War-era law that encourages people who witness fraud against the government to sue on its behalf. The “reverse false claims” provision [31 U.S.C. § 3729(a)(1)] declares that any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government . . .” is committing a crime.
Tycko writes in an August 2023 article in The National Law Review that the FCA allows a private citizen or company with nonpublic information about such fraud to bring a “qui tam” lawsuit in the name of the government to recover monies owed to the government — plus additional penalties — because of that fraud. The person or company that brings the lawsuit is called a “relator,” although they’re often referred to as the “whistleblower.” If the case is successful, the relator receives a monetary award of between 15% to 30% of the amount recovered for the government.
Tycko, as he recounts in The National Law Review article, analyzed DOJ press releases from August of 2011 through July of 2023. From all qui tam settlements in that period, he found 43 totaling $220,219,814, with an average settlement of $5,121,391 and a median settlement of $1,300,000. In 38 of the 43 cases, he determined that the government awarded a total of $20,805,000 to the relators for an average of $547,500 per case.
Tycko also found that in the 43 qui tam settlements, China had exported 74% to the U.S. No other country was involved in more than two of the settlements involving imports from Vietnam and the U.K.
According to the Whistleblower Law Collaborative, the DOJ has been active in this area, with several notable cases:
The International Chamber of Commerce (ICC) has developed a series of predefined terms, Incoterms 2020, that legally define the key parts of international commercial freight. “What this means is if you’re in Vietnam, let’s say, and I’m in the U.S. and I want to buy some widgets from you, the ICC has standardized terms — recognized in the international trade community — that are going to surround that transaction,” Tycko tells Fraud Magazine. “The traditional transaction is you’re going to load the widgets onto a ship in Vietnam and send them to me in the U.S. Then they become my property, and I — as the importer — am going to pay just the duties that are owed on those products. … But now there’s an alternative way called DDP, ‘delivered duty paid,’” he says.
In the DDP system, the Vietnam seller is responsible for all costs and risks until the goods are delivered to the buyer, including all import duties, taxes and customs clearance in the buyer’s country. The buyer only needs to pay for the goods, Tycko says.
“What I’ve seen recently is a huge surge in people talking about Chinese companies offering DDP pricing,” Tycko says. “Why would they suddenly be doing that? The reason is that many Chinese companies are willing to cheat on U.S. tariffs. They don't care about the U.S. tariffs. … They tell the U.S. customer, ‘Don't worry about the tariffs; we’ll pay the duties and will deliver them to you for this price’ and the duties will have already been paid.
“The customer in the U.S., of course, knows what that widget costs because they've previously been buying them, and they know what the tariff costs and the DDP price. Let’s say the widget costs $10, and there’s a 100% tariff; that widget should now be $20,” Tycko says. “But the Chinese company says it’ll sell each widget for $12 DDP, one price, no questions asked. Well, the company in the U.S. now has plausible deniability. ‘Well, we didn’t fill out the paperwork; we don’t know how much they’re paying.’ But they must know there’s some cheating going on.
“There’s a lot of this DDP fraud happening right now, and there will be more of it if the tariff rates stay high,” he says.
Tycko predicts that U.S. tariff levels will probably stabilize before the end of 2025, but even before the recent tariff increases, he says approximately 70% of Chinese-made products were subject to tariffs of up to 25%. Currently, most Chinese-made products are subject to U.S. tariffs of at least 55%, he says. “There’s a lot of incentive to engage in this kind of cheating.”
Customs departments in every nation require importers to declare country of origin of their products. It’s a simple process when the imported good is a raw material, something like wheat. But the process is more complicated when a product consists of parts made in several countries. Tycko deconstructs a leaf blower for illustration. “A leaf blower consists of a fan, a power source and cord, and the plastic tube with a handle; all these components are produced in different nations. A series of U.S. rulings have determined that the country that made the motor is the country of origin because it enables the essential function.
“Let’s say you’re an importing company that makes leaf blowers, and you buy your motors made in Chinese factories because they can produce them the cheapest, but you don’t want to pay China tariffs,” Tycko says. “So, you move those little motors to some other country like India, Vietnam or Malaysia, and you buy all the other components from India. You assemble all those pieces together in some factory in India, send them to the U.S. and tell U.S. customs that your leaf blowers’ country of origin is India.
“Under U.S. law that’s absolutely 100% not true. I’ve seen very large, sophisticated, name-brand companies do this because they know they can get away with it. U.S. Customs and Border Protection doesn’t know supply chains by just inspecting a finished product unless somebody like an inside whistleblower or competitor reports suspicions. It’s easy to slap tariffs on products of particular countries but hard to catch cheaters. Unfortunately, the least ethical companies that don’t have strong internal compliance departments are rewarded the most. It becomes a race to the bottom,” Tycko says.
“Discovering fraud in customs, of course, is based on being able to accurately notate the cost and quantity of the imported goods, and other specifics, along with the country of origin,” says James C. King, CFE-Ret. King worked for the then-U.S. Customs Service (now the CBP) for about 17 years. Among several other customs positions, he was a district fraud coordinator of the U.S. Customs Office of Investigations in Detroit, Michigan; a member of the teaching cadre at the Federal Law Enforcement Training Center in Marana, Arizona, instructing on fraud investigations; and senior special agent, Internal Affairs for the U.S. Customs Service in Houston, Texas. (James C. King is the other King in this article; he’s no relation to John B. King. – ed.)
In January 1986, King was working a customs case in Troy, Michigan, a suburb of Detroit, in which a major textiles manufacturer from Taiwan had conspired to export its goods for retail sale in the U.S. with fraudulent “textile visas.” The importer was the-then K-Mart Corporation; it handled all its international imports through its headquarters outside Detroit, King says. [The U.S. once issued textile visas to non-U.S. nations that they’d provide to manufacturers who’d then give them to importers of their goods. The importers would present them in the U.S. as stamps of endorsement that verified the country of origin, types of textiles, quantities and prices as negotiated by both countries. The U.S. stopped issuing textile visas in 2005, but the same type of fraud could happen today with the manipulation of the manufacturer or shipper identification codes (MID), issued by the CBP, which replaced the textile visas. The CBP is testing a new global identifier system, which could replace the MID system.]
“The Taiwan government would sell some of these textile visas provided by the U.S. to Taiwan manufacturers, but in this case, Taiwan issued some ‘free’ visas from their allocation to manufacturers to be used on high-end textile merchandise,” King said. “The free visas could not be bought and were given to be used only with high-end exported textiles. By doing this, the Taiwan government wanted to improve the perceived quality and reputation of Taiwan textiles, while boosting the monies flowing to Taiwan from the importers to the manufacturers,” he explains.
“My job was to verify the prices as true and accurate on the customs entries filed with the customs service on which the importer paid duties.” (A customs entry, King says, is a formal declaration made to CBP — or similar agencies in other countries — providing such details as value, classification and origin. These agencies use them to determine duties and taxes.)
“This importer had colluded with the foreign manufacturer in Taiwan to import more low-end textiles than the Taiwan government wanted to be exported,” King says. “The scheme called for fictitious prices to be applied to merchandise to have it exported from Taiwan to fool the Taiwan government and then to change the prices to the correct prices when entering the goods with U.S. Customs, claiming lower costs for the free visa textiles.
“Had the correct prices been declared to the Taiwan government, they would not have been covered by the appropriate textile visas, they would not have left Taiwan, and they would not have been imported into the U.S.,” King says. “By manipulating prices, the American importer exported more low-end textiles than allowed, which the importer sold to increase its profit market.”
King suspected early on that the importer had lied about the worth of the Taiwan imported textiles, so he had to verify more than 100 customs entries — an arduous task. King says he later met with the corporation’s import manager, an administrative assistant — who was assigned to “help” King conduct his verifications — plus a corporate lawyer. The import manager then excused himself. King says his verification was boring and time-consuming, so the corporate attorney eventually also left. However, King had discovered someone had pasted small pieces of paper over the original invoice prices. “I made photocopies for my report showing the various new prices,” he says.
When King was done with the tedious but fruitful review a few days later, he says that he asked the import manager why the figures had been changed. The manager then quickly arranged an interview with the company buyer.
“During my earlier interactions with the company buyer, I realized he had an ego problem,” King says. “He was very conscious of wealth, and I believed it drove all his decisions. I had noticed that he wore expensive suits and had an exquisite watch and accessories. I wanted to play his faults to my advantage. I figured that if he thought I wasn’t as smart as he was, he might want to impress me with how he could scam the system.”
King says he wore his oldest, out-of-style, double-knit suit during his interview with the company buyer. “In my best ‘Columbo manner,’ I tried to act like a bumbling, naive investigator,” he says. “I asked him why I’d found various sales prices for the imported merchandise from Taiwan. He said that prices had changed from when the merchandise was ordered to when it was delivered for sale. I said that his explanation sounded reasonable and closed my notebook. Then I leaned towards him and said, ‘I just don’t understand why the prices would change so much.’
“Then he decided to let me in on a secret and share his expert knowledge of successful textile trades with a lowly bureaucrat,” King says. “He explained that the manufacturer was getting free high-end visas for the export transactions and explained how the textile visa system worked in Taiwan.” King says the manufacturer/exporter had to use phony invoices to get the merchandise through Taiwanese customs and into the U.S. by using the free textile visas for the shipments.
“Only when I reopened my notebook and wrote down his admissions did it dawn on him that he’d just confessed to import valuation infractions to U.S. Customs,” King says. “Had he used the correct values of the textiles at the time of importations, U.S. Customs could have shared the information with Taiwanese Customs — with whom we were on friendly terms — causing the fraudulent exportation/importation scheme to fail. Instead, the importer chose to participate in a fraudulent scheme involving the importations.”
After King completed the case, U.S. Customs imposed and collected about $1 million in fines and penalties from the corporate textiles importer involving hundreds of fictitious importation values in this documented fraudulent importation scheme.
Non-coffee drinkers think that all coffee tastes alike, right? Well, tell that to expert coffee tasters. John B. King, CFE, worked a case in which imported coffee was undervalued by importers to take advantage of lower tariffs. “The fraudster importers shipped their Colombia coffee beans first to a Middle Eastern country and then into the U.S.,” King says. U.S. Customs caught the part of the shipment that the importers carelessly forgot to re-label. “We told them that they could either destroy the beans or ship them back to Colombia!”
Another coffee-bean importer had told U.S. Customs that the importers had been charging consumers two dollars less on the going rate per pound, which should’ve left the fraudsters in a hole with no profit. U.S. Customs employed the competitor’s coffee tasters to confirm that the underpriced beans were high quality. The fraudsters were able to price the beans lower than their competitors, and gain an unfair advantage, because of the thousands they saved on lower tariff costs, King says.
Coffee beans prices continue to rise because of droughts, flooding and other factors.
And honest U.S. coffee roasters are frustrated because of increased costs from tariffs and because they can’t “buy American.”
“The only coffee made on U.S. soil comes from Hawaii and Puerto Rico,” Scott Gilbert, co-owner of Tug Hill Artisan Roaster in Lowville, N.Y., tells WWNY Television. Gilbert says he’s now paying an additional 50 to 60 cents per pound on coffee beans on the tariffs. Import fraudsters can easily underprice U.S. roasteries by using false declarations, misclassification, false invoices and underreporting of quantity schemes.
The Silk Road, a network of ancient trade routes, connected the East and the West, beginning in the second century B.C. The exporting of goods between China and the Roman Empire fostered prosperity and cultural exchanges. Of course, free trade eventually engendered tariffs and then fraud schemes to circumvent customs at ports of call.
As ever-changing U.S. tariff rates affect trading parameters around the world, we should know the latest customs fraud schemes, how whistleblowers are using the U.S. False Claims Act to report fraud, fraud investigators’ efforts to deter schemes and how these burgeoning crimes affect companies that buy goods from other countries. And those frauds impact all of us.
[See “Public companies can avoid fraud trouble by pursuing tariff regulations transparency” at the end of this article.]
Dick Carozza, CFE, is editor-in-chief emeritus of Fraud Magazine. Contact him at dcarozza@ACFE.com.
U.S. tariffs are evolving now, but public companies must avoid even hints of fraudulent behavior by complying with regulations and managing financial reporting for tariffs.
Chris Ekimoff, CFE, CPA/CFF, is well-versed in counseling businesses in detecting, preventing and deterring fraud in accounting processes. He’s a director in the Financial Investigations & Dispute Services (FIDS) group based in the Washington, D.C., and New York City offices of RSM US LLP. Ekimoff was also the co-host of the Practising Law Institute’s inSecurities Podcast. He led the session “Mitigating Financial Statement Fraud Risk: Who Bears the Cost?” at the recent 36th Annual ACFE Global Fraud Conference. Ekimoff is a member of the research committee of the ACFE Research Institute.
Ekimoff says fraud allegations against public companies can take one of a few forms involving tariff regulatory requirements:
“Of course, these examples assume that there is a clear standard for compliance, noncompliance, and what the tariff requirements are and will continue to be,” Ekimoff says.
Details of individual tariff requirements continue to evolve, Ekimoff says, but in a vacuum, a tariff compliance checklist includes a framework for identifying applicable tariff requirements based on economic activity, geography, past business activity, future investment and noncore business considerations:
“Like most regulatory requirements, tariff compliance adds another element of consideration for fraud risk management,” Ekimoff says. “Based on the Fraud Triangle, accountants and auditors should think critically about how the motivations, incentives and opportunities for manipulation or fraud may change as tariff requirements change.” He says tariff requirements are currently a fraught topic, but businesses should treat tariff requirements similarly to all other laws and regulations. “That allows a company to appropriately consider the treatment of fraud risk in relation to its tariff obligations.”
“As with any internal accounting system, each business should utilize its accounting and financial reporting framework to comply with generally accepted accounting principles (GAAP),” Ekimoff says. “Some updates may include estimations of applicable tariff costs, additional costs for supply chain disruptions or supplier pricing volatility, or other similar impacts of tariff requirements.”
Ekimoff discussed changes that public companies should make in the Management’s Discussion and Analysis (MD&A) section of SEC filings in response to changing tariffs. “I think MD&A considerations will continue to include more discussion of the impact of U.S. federal government activity on the ongoing financial reporting and performance of public companies,” he tells Fraud Magazine. “Although tariffs are a current focus, companies should broadly consider additional potential policy changes that may impact markets and the economy for the foreseeable future.”
“Because the impact of tariffs is covered so broadly in the news, on social media and in markets, there is little downside in discussing tariff impacts on business operations,” Ekimoff says. “Further still, companies that are not transparent about their potential effects may find themselves with tough questions down the road if expectations are missed or performance is negatively impacted.”
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