Importers take note: The Department of Justice is making the detection of, and punishment for, trade and customs fraud a top enforcement priority.
It’s the agency’s number-two priority, to be precise — second only to smoking out “waste, fraud and abuse” in white-collar crime, especially in health care and government procurement programs.
In a policy memo issued in May, DOJ singled out “trade and customs fraud, including tariff evasion,” as an area of particular focus. And the fact that the agency is zeroing in on such practices at the same time President Trump is imposing high tariffs on most U.S. trading partners is no coincidence.
“This memo to me was not a surprise,” says Tom Gould, chief strategy and compliance officer with Gaia Dynamics, provider of an artificial intelligence-driven global trade compliance platform. He notes that the arrival of double- and even triple-digit tariff rates are ensuring that “the government’s going to want to make sure it’s collecting the right amounts of money — even for companies making mistakes.”
For many years, Gould says, government investigators would occasionally turn their attention to tariff fraud, “but compared to other things like [income] taxes, it pales in comparison.” Now, businesses need to pay much closer attention to their tariff and trade strategies. “This memo is a clear signal to companies that it’s time to do that, and if they don’t, they’re going to get hit.”
Penalties start at two times the loss of revenue to the government resulting from underpayment of tariffs, and can go much higher, even involving criminal prosecution, Gould says. But the mere unintentional misclassification of imports is enough to saddle businesses with a potentially heavy financial burden.
Companies need to prepare, Gould says. The “cornerstone” of compliance is adherence to the Harmonized Tariff Schedule of product classification. In fact, importers must correctly state three elements: the product in question, its country of origin and value. (Tariffs are set as a percentage of that last one.)
There may sometimes be legal opportunities for stating alternative classifications that result in a lower tariff rate. But DOJ and Customs and Border Protection are casting an eagle eye on any attempt to bypass or minimize tariffs through the misstating, intentionally or not, of those three required data points.
Given the complexity of global manufacturing supply chains, a product’s country of origin isn’t easy to nail down. It’s not always the point of shipment of finished goods, especially if the shipper or importer is trying to sidestep high tariffs by routing them through a third country — a dodge that government regulators are increasingly on the lookout for.
Valuation, too, involves “a lot of nuance,” especially when considering all of the raw materials that go into a manufactured product, Gould says.
He advises companies to marshal their internal resources to ensure strict compliance with tariff rules. Current technology, including the use of artificial intelligence, can help. It could also be a matter of shifting existing personnel from oversight of financial activities to that of trade and tariffs, or even beefing up staff with suitable experts.
Small to medium-sized traders, given their limited resources, could find it especially difficult to walk the narrow compliance path. Their first resource for outside help is a customs broker, which makes declarations on their behalf. But when violations occur, it’s the importer who’s held responsible.
Companies also need to undertake a detailed review of past declarations, to ensure compliance with present-day practices, such as the growing popularity of Mexico as a manufacturing alternative to China and other parts of Asia. “You may have classified a product five years ago,” Gould notes, “but in today’s environment, companies need to go to the next level — to reevaluate the classification of products to ensure that what was decided [then] is correct.”
Gould further advises companies to proactively report any misclassifications or other misstatements they might uncover. In doing so before Customs discovers the error and launches a formal investigation, they become liable only for the amount of the underpayment — not any additional punitive penalties that can jack up the fines.
Facing a five-year statute of limitations, companies might think they’re rolling the dice by concealing any underpayments they discover internally. But they’ll pay a high price for losing the bet — and, given the government’s new enforcement priorities — that’s an increasingly likely outcome.
“The head of DOJ is saying to all Criminal Division personnel: This is your focus today,” says Gould.