If you don’t think customs fraud is rampant, consider this: On July 25, the Department of Justice (“DOJ”) accused the president of the San Diego Customs Brokers Association of fraudulently avoiding $10 million in customs duties on imported goods his company had promised to re-export “in bond” to Mexico, but instead resold within the United States. The imports were entered through the Port of Long Beach in 60 shipments over one year and comprised over $100 million in Chinese textiles, Indian and German cigarettes, and food products from Mexico – including prickly pear tainted with Salmonella Agona, and snack foods adulterated with a prohibited dye.
Of special note: The customs broker and his eight alleged co-conspirators each faces up to 20 years in prison under each of 53 counts in the criminal complaint for a maximum possible sentence of 1,060 years. Those counts are based on a relatively new obstruction of justice statute – 18 U.S.C. § 1519 – which Congress included in the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) in response to the government’s problems in prosecuting document destruction cases related to Enron’s collapse.
United States v. Chavez appears to be the first case in which DOJ – supported by U.S. Immigrations and Customs Enforcement (“ICE”) and U.S. Customs and Border Protection (“CBP”) – has based criminal customs fraud charges on the grounds that an importer’s submission of falsified entry documents – and its efforts to cover up the fraud – constitute obstruction of justice under Section 1519. This suggests that DOJ will increasingly use Section 1519 and its 20-year incarceration penalty in an effort to deter future acts of customs fraud.
Customs Fraud In Context
Most products sold in this country – whether imported or made here – are subject to a matrix of federal laws and regulations intended to provide Americans with significant benefits, such as safe food, safe products and a cleaner environment. The compliance costs for producers here and abroad are substantial. Further, imports can be subject to additional costs and restrictions, such as import duties and quotas.
But it is much more difficult for federal regulators to enforce regulatory compliance on imports than on American-made goods. Unlike domestic producers, foreign producers – and their principals and production assets – are effectively beyond the reach of U.S. regulators. Unscrupulous U.S. importers typically execute compliance-avoidance schemes by including false information in the substantial paperwork they submit for each entry to CBP, the agency primarily charged with ensuring import compliance. While importers are within the regulators’ reach, their fraud is difficult to detect, and, when it is, the importer typically is thinly capitalized, rendering it judgment-proof, and its principals quickly disappear and thereby avoid being charged.
Given the significant savings generated by avoiding regulatory compliance, the low risk of detection, and the minimal loss incurred if caught, dishonest foreign exporters and U.S. importers have a considerable incentive to feign regulatory compliance on their imports. But such customs fraud comes at a substantial public cost because it deprives citizens of the benefits sought by the avoided regulations and gives the cheating parties a significant unlawful cost advantage in the U.S. market over competing domestic producers and honest importers. Successful customs fraud thus encourages the foreign relocation of domestic production.
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