Chinese Forklifts “Made in America” – A Case Study of Customs Fraud and False Origin Labeling in Import Cases

by Anna D’Agostino and Quintin C. Cerione

In August, a federal grand jury charged two Denver companies, Endless Sales Inc. and Octane Forklifts, Inc., and their executives (collectively, “Defendants”) for selling forklifts fraudulently labelled as American-made to the federal government and for avoiding paying applicable tariffs on the imported machinery. Lying at the heart of this scheme was Defendants’ deceptive practice of labeling their imports as “Made in USA,” deliberately misleading the federal government in its purchase of these forklifts. This misrepresentation serves as a reminder of how wrongdoers can be held civilly and criminally liable for customs fraud.

According to a Department of Justice press release, Defendants imported forklifts from China, fraudulently claimed the forklifts were manufactured in the United States, and then sold them to federal government agencies.  Defendants also conspired with an individual and company in China to create fake invoices understating the cost of the forklifts, allowing Defendants to avoid mor than $1 million in applicable duties, and fees, and tariffs.  All Defendants were charged with attempted fraud and conspiracy, and the individual executives were additionally charged with wire fraud counts.  If convicted, Defendants may face hefty fines and prison time.

 What is customs fraud?

Customs fraud is an illegal practice that seeks to lower the custom duty, tariff, or tax imposed on goods that are imported to the United States by misrepresenting information about the goods.  For instance, an importer may declare a falsely deflated value of goods, misclassify goods with lower tariff schedule codes, transship goods through a third country to conceal the true country of origin, or even engage in illegal wildlife trade of protected or endangered species.

As relevant in the forklift scheme, customs fraud also includes false origin labeling, which occurs when a company misrepresents or falsifies the origin of a good it is selling to avoid paying proper tariffs. This form of deceptive advertising deliberately misleads consumers and competitors and violates U.S. trade law, breaching the Federal Trade Commission’s “Made in USA” Labeling Rule (16 C.F.R. Part 323).

When can customs fraud trigger liability under the False Claims Act?

The False Claims Act (“FCA”) imposes liability on companies and individuals who defraud the federal government or its programs.  A specific portion of the FCA, known as the “reverse false claims” provision, creates liability for one who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”  31 U.S.C. § 3729(a)(1)(G).  Customs fraud deliberately avoids or reduces an obligation to pay the government through tariffs, duties, or taxes. In other words, as customs fraud is a means to avoid paying money legally owed to the federal government, it directly implicates the reverse false claims provision of the FCA.

Although the Defendants in the forklift scheme were not charged under the FCA, they could have been held liable for their failure to pay tariffs due on goods made in China, depriving the government of this income. The forklift scheme Defendants also could have faced liability for falsely certifying to federal agencies purchasing the forklifts that the machinery was made in the U.S.

Other instances of customs fraud could also trigger liability under the FCA.  For example, deliberately misrepresenting the value of imported goods to pay lower duties or incorrectly classifying a product to take advantage of different duty rates or exemptions would fraudulently decrease the amount of money owed to the government, in violation of the reverse false claims provision.

What Are the Financial Incentives and Legal Protections for Customs Fraud Whistleblowers?

While the FCA allows private individuals to file lawsuits on behalf of the government to report fraud against federal programs and contracts, coming forward to expose customs fraud can have significant risks.  Fortunately, there are several financial incentives and legal protections that exist for customs fraud whistleblowers. For instance, the FCA protects whistleblowers from employer retaliation – including suspensions, demotions, and termination – as a result of their efforts to blow the whistle.  Moreover, whistleblowers are entitled to between 15% and 30% of the government’s recovery from a successful lawsuit. This can be a meaningful amount, especially because the FCA calls for treble damages, or three times the actual damages from the fraud.

How can whistleblowers report customs fraud in import/export operations?

If you have knowledge about a potential instance of customs fraud and you are interested in becoming an FCA whistleblower, consult an attorney to learn more about your options.  The FCA attorneys at Miller Shah can help you ensure your claim is properly documented and protected and walk you through the steps of bringing a lawsuit on behalf of the government.

Whistleblowers also have the option to submit customs fraud allegations to the U.S. Customs and Borders Protection Trade Violations Reporting system. Either way, Miller Shah can help you determine the course of action that is right for you and work alongside you to stop customs fraud.