Customs Fraud Under the False Claims Act: Losing GSP Status

I am a lawyer who handles qui tam lawsuits under the False Claim Act, in
which whistleblowers sue companies that have gotten money from the Federal
Government by fraud. The area of customs has been particularly rife with
fraud. By federal law, the President and customs can designate certain,
third world countries that will receive special treatment in customs.
In order to help the economies in these countries, goods coming from those
countries enter the United States duty free. Of course, any time a special
benefit is available, some people are tempted to cheat. Some importers
have claimed that their goods are from a beneficiary developing country
(BDE), when in fact they are not.
Customs industry whistleblowers have the opportunity to report this fraud, and to get a percentage of
what the Government recovers from the fraudster.

I have been blogging about the rules that determine when goods “enter
into the stream of commerce”, and thus either lose or gain their
duty-free status. I will discuss a few additional points today.

1. Quality control inspection. Customs has ruled that goods enter into
the stream of commerce where the intermediary does the following:

* Inspects randomly selected units and makes a statement that the merchandise
had been inspected according to Military Standard 105-D.
HQ 557647.

Garments would be considered “manipulated” in Israel, and
would enter its commerce, if the company inspected randomly selected units
and made a statement that the merchandise had been inspected according
to Military Standard 105-D.
HQ 557647 (July 14, 1994).

* Physically examines garments for size specifications, color, quality
workmanship, fabric shading, etc., and states the merchandise was inspected
according to Military Standard 105-D.
HQ 557943 (9/21/1994).

Items entered the commerce of Israel where “selected garments will
‘be physically examined for size specifications, color, quality
workmanship, fabric shading, etc.’ and the company stated that the
merchandise has been inspected pursuant to Military Standard 105-D. HQ
557943 (September 21, 1994).

* Makes a detailed inspection of goods.
HQ 559622 (3/19/1997)

“[T]he magnesium entered into the commerce of Finland when it was
subjected to detailed inspection in that country.” HQ 559622 (March
19, 1997).

* Performs a final inspection and packaging of goods. HQ 560250 (4/10/1997).

Goods will be considered to enter the commerce of Israel if they are sent
to Israel and they:

“undergo a final inspection and packaging,” HQ 560250 (April
10, 1997).

* Cleans and packages and performs quality control procedures on jewelry.
HQ 559406 (4/25/1996).

Likewise, where gold jewelry “upon return to Israel will undergo
quality control procedures and be cleaned and packaged for direct export
to the U.S.” Customs found “the gold jewelry is considered
to enter the commerce of Israel prior to direct exportation to the U.S.”
and “will be considered to be ‘imported directly’ from
Israel into the U.S.” HQ 559406 (April 25, 1996).

2. Labeling. If any of the labels on the packages were added in the non-qualified
country, the items would lose their GSP status. Customs has ruled that
goods enter into the commerce of the intermediary country if they are:

* Labeled, even on the outside of the box in which an item is placed. HQ
560435; HQ 561386.

“However, we are informed that upon arrival from Thailand at the
bonded facility in Canada, the radiators will undergo a labeling operation
which includes the placement of a label bearing the Coulter name and part
number on the outside of each box. . . . Inasmuch as Canada is not a BDC,
any labeling operation is outside the scope of activities permissible
under the regulations and the radiators will not be eligible for preferential
duty preference under GSP upon entry into the U.S.” HQ 560435 (February 5, 1998).

“Inasmuch as Canada is not a BDC, any labeling operation is outside
the scope of activities permissible under the regulations and the radiators
will not be eligible for preferential duty preference under GSP upon entry
into the U.S.” HQ 561386 (June 15, 1999).

* Repacked, marked, labeled, and in some cases pasteurized (e.g., caviar).
NY B88404.

Caviar could be imported duty-free where it “remains in the original
packing,” but not where it “is repacked into other containers,
marked, labelled, and in some cases, pasteurized.” “The product
is statutorily excluded because it is repacked and/or pasteurized.”
NY B88404.

3. Cleaning and polishing. If items such as jewelry are cleaned or polished
in an intermediary country, they lose their GSP status. (Of course, in
order to be cleaned and polished, obviously the items have to be removed
from its original packaging, which in and of itself would invalidate the
GSP eligibility.) See HQ 559406 (April 25, 1996).