Dual-Invoicing Customs Fraud Case: A Lesson for Retailers (and Others)

Dear Friends:

We thought that you might be interested in a recent dual-invoicing customs fraud case that caused a large U.S. retailer significant heartburn.  The case offers important lessons that all importers should heed.

Background

A third-party supplier to a major multi-channel electronic retailer pled guilty in U.S. federal court to the criminal charge of intentionally defrauding the United States of more than $1 million in customs duties.  The supplier, Fai Po Jewellery (H.K.) Co., Ltd. (“Fai Po”), was ordered to pay nearly $2 million in criminal fines and restitution and placed on probation for a period of three years.[1]

According to the U.S. Department of Justice, Fai Po ran a double-invoicing scheme under which it fraudulently evaded the payment of U.S. customs duties by invoicing the U.S. purchaser for the true cost of the goods, while enclosing with the shipments invoices that intentionally understated the value of the merchandise (the merchandise involved was subject to high U.S. duty rates).  The invoices that accompanied the shipments were used by an express courier/customs broker to clear the goods.  As noted in the U.S. Immigration and Customs Enforcement (“ICE”) press release, the U.S. purchaser was not aware of the scheme (i.e., the U.S. purchaser was not the importer of record) and did not benefit from it.

Implications for US Retailers

While the media and legal blogs have focused on the direct implications for the foreign supplier, the case is also instructive for U.S. retailers or other importers who purchase goods on “delivered” terms.

In the retail industry, it is quite common for retailers to purchase merchandise on “delivered” terms and to have suppliers be responsible for importing the merchandise into the United States.  Under such an arrangement, the retailer generally does not receive copies of the entry documents submitted to U.S. Customs and Border Protection (“CBP”), as the supplier, or its designated customs broker, acts as the importer of record of the merchandise.  Although a U.S. retailer does not act as the importer of record under such an arrangement and may, in fact, have limited knowledge in connection with the information submitted to CBP regarding the importation of the merchandise, such an arrangement does not shield the retailer from potential liability for duties owed to CBP, as the retailer may still be the “ultimate consignee” of the merchandise under U.S. customs law.

In addition, a U.S. retailer under such an arrangement may be exposed to potential civil penalties under 19 U.S.C. §1592.  In this regard, U.S. customs law prohibits any person from entering or attempting to enter merchandise into the United States by material and false statements or acts or by material omissions, and from aiding or abetting a person to commit the foregoing violations.  See 19 U.S.C. §1592(a)(1)(A)-(B).  U.S. courts have held persons other than the importer of record liable for violations of 19 U.S.C. §1592.

Actions to Consider

The lesson for U.S. retailers here is that arrangements with third-party foreign suppliers to purchase merchandise on “delivered” terms do not necessarily insulate the retailers from potential liabilities under U.S. customs law.  U.S. retailers who utilize such arrangements should review agreements with their suppliers to ensure that the suppliers are required to include invoices with each shipment of merchandise.  In addition, retailers should make certain their internal controls include procedures to review their purchase orders against the suppliers’ invoices to ensure that the prices match, as well as procedures for addressing any situations in which the prices do not match.

Conclusion

U.S. retailers that recognize the risks associated with such arrangements can take steps to minimize the likelihood of finding themselves in a situation similar to that of Fai Po’s U.S. customer.  Having documented internal controls to address such risks and evidence that such controls are followed can also reduce the risk of potential penalties under U.S. customs law.

*             *             *

We trust that the foregoing is helpful.  If you have any questions about supplier arrangements or your obligations under U.S. customs law, please let us know.

Best regards,

Ted


[1] The retailer sued Fai Po in a related civil action.  The case was dismissed in November 2013 after the parties reached a settlement.

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