Customs Struggles to Keep Fraud in Check

An importer of heavy machinery is consistently underbid by a rival importer when they compete for sales contracts. Some research shows the competitor’s price is actually less than the cost of manufacturing. It turns out the only way the competitor could be making money is by cheating Customs.

“I’ve had instances where it’s a clear-cut misclassification. Our guys are doing it one way, (and) the competitor is getting an unfair advantage because they’re misdescribing the goods, and paying no duty or significantly reduced duty,” said Susan Kohn Ross, international trade counsel at Mitchell Silberberg & Knupp in Los Angeles.

Even when the case clearly seems to be fraud, Ross said importers have trouble getting the attention of Customs and Border Protection. There are too few import specialists and auditors on the front lines to investigate.

“They can’t make the case because they don’t have the manpower,” Ross said. “If you don’t tell them what’s going on, how it’s going on and why it’s going on, you can’t even get in the door.”

She said most attorneys around the ports of Los Angeles and Long Beach can tell similar stories, though it’s unclear how widespread the problem is. There’s a wide range of explanations as well. Customs agents — the “fraud dogs” — who investigated such cases were transferred to the new Immigration and Customs Enforcement when the Department of Homeland Security was born in 2003. While they’re still on call to Customs, many note the ICE agents’ No. 1 priority has been illegal immigration, with intellectual property rights cases recently taking a strong second place.

Len Rosenberg, founding partner of Sandler Travis & Rosenberg in Miami, said Customs lost some of its investigative know-how when agents were put in ICE. “It’s not that the expertise doesn’t exist; it’s just not under the same hierarchy that it was before. Clearly, IPR is out in front. We get a ton of IPR cases out of Miami.”

John Wilk III, former head of Customs’ Fines, Penalties and Forfeitures office in San Diego, complained that Customs has downgraded commercial fraud in its training course at the Federal Law Enforcement Training Center in Glynco, Ga. Attorneys from Customs’ Office of Regulations and Rulings in Washington used to spend nearly half of the 11-week course drilling recruits in how to handle fraud cases. That portion of the course has been reduced to a few hours of a one-size-fits-all course.

“There is no need for specialization and expertise. Customs said, ‘We’re going to make sure everyone can do everything.’ So the knowledge became a mile wide and an inch deep,” Wilk said. “You’re starting to generate inspectors who can’t inspect. You have the inability to know when you have a problem, and the inability to process that problem.”

Wilk said the de-emphasis on commercial enforcement started after the Sept. 11 terrorist attacks, when Customs reinvented itself as the nation’s border guardian. To make matters worse, Fines, Penalties and Forfeitures officers at the ports have supervisors who are promoted from the inspector ranks — with no fraud-investigation experience.

Charles D. Ressin, head of the penalties branch of the Office of Regulations and Rulings, said the loss of agents to ICE changed the way his office did business, but import specialists and auditors in the field are filling the gap. “They are making good 592 cases,” Ressin said, referring to the section of Customs law on fraud. “It’s evolving. We had to switch over in the beginning, but I think now we’ve caught up, if there ever was a gap to begin with.”

Instead of sending attorneys to Glynco, Ressin said his office just finished developing a new commercial fraud course with Customs’ Office of Training and Development. “We are still sending our attorneys to the ports on a case-by-case basis. I don’t think there’s been a diminution overall. I think, like with the ICE agents, it’s a shift.”

Ressin said the field staff is processing 592 cases and much more. “We have Priority Trade Issues, public health and safety, and anti-dumping duties,” Ressin said. “IPR has really taken over. Those have their own penalties.”

Does this mean that Customs’ enforcement personnel are stretched too thin? “I’ll only answer that by saying we can always use more resources,” Ressin said.
Rosenberg, who spent five years in Regulations and Rulings, said Customs doesn’t seem to have as many high-profile fraud cases as before. By and large, most importers are making an honest effort to comply with the law.

“The overwhelming number of importers are honest, and the only thing they’re trying to do is sell their goods,” Rosenberg said. “The smaller guys don’t know the law or understand it, and the larger guys sometimes get caught in the paperwork. They’re not attempting to violate the law.”

Customs is probably missing cases because of the bureaucratic wall between itself and ICE, Rosenberg said, “but to say the bottom has dropped out, I don’t think that’s accurate either.”

Contact R.G. Edmonson at bedmonson@joc.com.