Not surprisingly, our China lawyers are getting a slew of phone calls and emails from companies that are looking at massive tariffs being imposed on their products imported into the United States. These companies want to know what they can and should do now to ameliorate or avoid their tariff problems. This is the first part in what will no doubt be a constantly ongoing series of posts on what you should be doing in light of the US tariffs being enacted against imports from China.
But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.
And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.
Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.
US Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.
Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, it knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. There is zero doubt the U.S. government is preparing to catch those who transship China products to avoid the new China tariffs. There is also zero doubt that both the U.S. government (and even the U.S. populace as a whole) are going to be tougher than usual on anyone who engages in transshipping
United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.
One of the biggest hammers against transshipping is the False Claims Act (“FCA”). The FCA ( 31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.
Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees (and even employees of the Chinese company that has assured you that your transshipping is perfectly legal) are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits and look how much they are paying for qui tam keywords.
Qui tam lawsuits are filed confidentially and are not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle with the defendant(s). If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the initial claimant may dismiss the lawsuit or pursue the lawsuit on its own.
What is your duty as the US buyer/importer to make sure the products you are importing are truly from the country listed on the import documents?
The examples below are illustrative.
- A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act.
- A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.
Transshipment is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and avoid liability and stay out of jail. The Trump Administration has made known its desire to vigorously hunt down and prosecute transshipment claims.
If you are doing business with a person or company using transshipments to minimize US customs duties, you could be in very big trouble and you should contact a lawyer immediately. If you are aware of such transshipments by a company with which you are not doing business, you should consider contacting a lawyer to determine whether you might profit from your information.
Here’s the thing though. There is often a lot you can do to legally change the country of origin of your products, but the key here is legally. The other key here is that the rules for figuring out the appropriate country of origin are incredibly complicated and best left to an experienced and qualified international trade lawyer, especially in light of all that is going on between China and the United States these days. Even our China lawyers do not claim to be qualified on this score and, for instance, about all I tell my clients who ask for country of origin help is something like the following:
About all I know is that putting together your electronics product in China and then shipping it to Vietnam for a plastic case to be put on it is not going to do the trick. Beyond this though, you are going to need to consult with our trade and customs lawyers because this is not something we can afford for you to get wrong.
So yes, it may be possible for you to make minor (or major) changes in how you are having your products made so they can legally avoid the China tariffs, but please, please, please tread carefully hear and whatever you do, don’t just go along with what your China factory is telling you to do. It’s your company and your money and your freedom that’s at stake here and this is not something on which you should be messing around and taking advice from anyone whose job it is to do anything but look out for your interests.