Fraud is … creating two sets of invoices.
We make some things—computers, couches, cauliflower—in this country, and we’re making more things in this country, but we still import many things, perhaps most things, from abroad. When we import things, we have to pay a customs duty on them. That’s a tax on imports. Even with the tax, it’s still cheaper to import them.
You know what makes them even cheaper? Not paying the tax. That’s illegal, sure, some people—the DOJ—will call it nasty names like customs fraud or tax evasion, but it does make things cheaper. Of course, you probably can’t get away with paying no taxes at all on the goods unless you’re a black market smuggler. But if you’re a respectable business with offices and executives and a customer service department, then you do not want to smuggle, you want to import. And if you import, you’ll pay a customs duty based on the value of the goods you import. To “minimize your tax burden” you’ll create one set of invoices to show the customs official—those invoices will show that the value of the goods is low. Now, the value of those goods is not actually that low and your counterparty abroad knows that they’re not that low and they want to get paid the full value of those goods. You’re a problem solver, so you create a separate set of invoices for your friends abroad so that they can get paid.
Problem solved? Sure, until someone in your organization notices and informs the Department of Justice of your little scheme.
Then, you’ve got a different set of problems. For a prosecutor, this is a pretty easy case. There is plenty of evidence to prove the fraud. What evidence? Well, the two sets of invoices is a strong, strong signal of fraud. Not a particularly difficult case once you’ve got two sets of invoices.
The Dallas Marketing Co., Xiamen Atlantis MFC Co., Raymond E. Davis, and Calvin Chang found that out firsthand after engaging in that type of scheme:
The government alleged that for customs valuation purposes, falsified invoices were created and submitted to U.S. Customs and Border Protection (CBP) containing false, lower values for the goods ADCO was receiving from China. It contended that a second set of correct invoices—invoices that were not submitted to CBP—were then used to ensure that ADCO paid its Chinese suppliers for the actual value of the goods.
https://www.justice.gov/usao-ndtx/pr/dallas-importer-and-two-chinese-companies-pay-25-million-resolve-allegations
The whistleblower remained anonymous and collected 20% of the recovery. $500,000 is not bad for handing a few invoices over to the Department of Justice.
Company insiders and customs brokers should beware of foreign imports that suddenly reflect product values significantly lower than the costs of those very same items just a few years ago. This is often a clear sign that a company is fraudulently reducing its customs duties owed to the government.
Vivek Kothari is a former federal prosecutor who represents whistleblowers. If you think you have seen evidence of fraud at your company, you can contact Vivek at 503-274-7425 or vivek@markowitzherbold.com.