When the Feds Don’t Like the Ambiance: Customs Fraud Can Get Importers in a World of Trouble

On August 26, the U.S. Department of Justice (DOJ) announced plea agreements with Ambiance Apparel (“Ambiance”) and its owner Sang Bum “Ed” Noh. The charges against Ambiance and Noh include a duty evasion scheme, which worked like this:

Ambiance imported clothing from Asian countries and submitted fraudulent invoices to U.S. Customs and Border Protection (CBP) that undervalued the shipments and allowed Ambiance to avoid paying the full amount of tariffs owed on the imports, according to court documents. At Noh’s direction, the Asian manufacturers prepared two invoices for the clothing ordered by Ambiance – one that usually reflected 60 to 70 percent of the actual price and was paid by letter of credit, and one that reflected the balance of the actual price and was paid by wire transfer. The first invoice, which fraudulently reduced the value of the shipment, was submitted to CBP and was used to calculate the tariffs due on the imports.

According to ICE, “over the course of just over 4½ years, Ambiance undervalued imports by about $82.6 million and failed to pay more than $17.1 million in tariffs.”

This is a timely reminder to importers of the grave risks associated with undervaluation. While Noh is on the hook for separate tax offenses as well, he is still looking at a maximum sentence of eight years.

Importers should be on guard against foreign suppliers who offer to help them “reduce” duty. These offers are sometimes rather blatant. Earlier this year, one of our clients started a text-message exchange with a Chinese supplier he suspected of colluding with his U.S. competitors to evade duties. Discussing possible reductions to the Section 301 China tariffs, the supplier said, “Even if no reduce [sic] , we save about 40% tariff.” When our client asked how, the supplier replied, “Lower cost in commercial invoice.”

In some instances, suppliers might double-invoice as a matter of course.  Keep in mind suppliers might be used to dealing with customers from countries where defrauding the customs authorities might not be a big deal. Even in the U.S., duty evasion is widespread in certain industries, and suppliers might assume customers want to play the same games as their competitors. A variation of the Ambiance scheme is to submit to CBP an invoice for samples (which are not subject to duty).

Undervaluation is not the only way in which importers can get in trouble with the Feds for duty evasion. Importers should ensure their goods’ country of origin is correctly declared, and beware of proposals to “save money” by simply transshipping goods through a third country not subject to tariffs. By far the most common illegal transshipment scenario these days involves Chinese suppliers shipping goods via Southeast Asian countries such as Indonesia, Malaysia, or Vietnam.

In some cases, suppliers will claim the goods will undergo changes in the third country, to a degree that allows them to be designated as goods of that third country (“substantial transformation” in customs lingo). Importers should ensure they have evidence of such substantial transformation. And by evidence, we mean more than an invoice or a certificate from the local ministry of trade or some brochure photos of the factory floor. Think videos documenting the entire process, from receipt of raw material to storage. Because a supplier could, if so inclined, send a video of some random factory, this is something importers will need to do themselves or have a reliable third party do it.

The last evasion musketeer is mislabeling, which entails declaring the entry of one products subject to no or lower duty, instead of the product actually entered. In some cases, this is close to impossible to pull off: A cow imported from China, whether bound for a dairy farm, breeding facility, or petting zoo, would be subject to Section 301 tariffs. However, with some goods there is room to maneuver. Take wooden bedroom furniture from China, which is subject to steep antidumping and countervailing duties (AD/CVD). A night table is considered bedroom furniture under the scope of the relevant AD/CVD order, but an end table is not. Earlier this year, DOJ announced an agreement with an importer and two of its executives, who were accused of having

conspired to evade millions of dollars in anti-dumping duties and customs fees by falsely describing wooden bedroom furniture imported from China as “metal” or “non-bedroom” furniture on documents submitted to U.S. Customs and Border Protection.  The defendants manipulated images of their products in packing lists and invoices, and directed their Chinese manufacturers to ship furniture in mislabeled boxes and to falsify invoices to help the defendants avoid detection by authorities in the United States.

These tricks might seem ingenious, but rest assured the Feds know all about them, and will hone in on importations whose fact patterns match those commonly used by duty evaders. We know this because we talk to them, and see how closely they scrutinize even legit transactions.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.