Supply Chain Audits Need Fresh Look as DOJ Focuses on Trade Fraud

Companies should be aware of the significant potential for criminal penalties from failing to comply with tariff and customs laws anywhere in their supply chains under the Department of Justice Criminal Division’s May 12 white-collar enforcement plan. Organizations should take steps now to ensure their compliance.

The new plan includes many enforcement priorities that will be familiar to criminal law practitioners—terrorism, fraud, bribery and money laundering, and violations of the Controlled Substances Act. It also includes an enforcement priority that may not commonly be thought of for criminal proceedings: customs and trade fraud.

President Donald Trump designated trade laws for greater criminal enforcement through a first-term executive order, and federal criminal statutes provide powerful tools to prosecute. This focus on trade, tariff, and customs fraud enforcement is, of course, consistent with a second term that has Trump highly focused on the nation’s trade deficit and broad-based tariffs.

The white-collar enforcement plan includes trade and customs fraud, including tariff evasion as priority No. 2 on a list of “high-impact areas” for investigating and prosecuting. The plan says the approach “will ensure that American businesses are competing on a level playing field in global trade and commerce.”

The DOJ also added the new subject area of “trade, tariff, and customs fraud by corporations” as a priority area in the revised Corporate Whistleblower Awards Pilot Program issued May 12. Individual corporate whistleblowers now have the incentive of potential financial compensation for reporting “original, truthful information about criminal misconduct” in the new focus areas that leads to forfeitures exceeding $1 million in net proceeds.

Information won’t be considered original or derived from independent analysis if the potential whistleblower obtained it through communication covered by attorney-client privilege. This underscores the importance of getting legal counsel involved early to help ensure compliance with trade and customs enforcement.

The DOJ could bring customs and trade fraud charges under a variety of criminal statutes. For example, 18 U.S.C. § 541 makes it unlawful to effect the entry of goods “at less than the true weight or measure thereof, or upon a false classification as to quality or value, or by the payment of less than the amount of duty legally due.” Similarly, 18 U.S.C. § 542 criminalizes the “entry of goods by means of false statements.” Both statutes allow fines and sentences of up to two years in prison for violations.

Perhaps the most powerful criminal statute for customs and trade fraud is 18 U.S.C. § 545, which makes importing merchandise “contrary to law” a felony punishable by up to 20 years in prison. This statute allows companies to be prosecuted for acts committed by anyone in their supply chain.

It applies to anyone who “receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale” of the unlawful merchandise. And companies need not have actual knowledge of the customs or trade fraud to be prosecuted; evidence they deliberately avoided learning the truth can suffice.

As criminal liability for trade violations rises, companies will need to adapt their supply chain audits to ensure that suppliers have complied with trade laws by sharing accurate information about products and paying the correct tariffs.

At the outset, outside counsel can scope such audits to consider the risk factors inherent in a business’s worldwide presence and ensure these audits are conducted properly and confidentially under attorney-client privilege. Even if an audit doesn’t detect trade fraud, its existence serves as evidence that a company has taken compliance seriously and wasn’t willfully blind to potential criminal liability.

The DOJ made clear in in the revised Criminal Division corporate enforcement and voluntary self-disclosure policy and the new the white-collar enforcement plan that corporations should get in the door early to self-report any issues of potential non-compliance: “Prosecutors in the Criminal Division must consider additional factors when determining whether to charge corporations, including whether the company reported the conduct to the Department, its willingness to cooperate with the government, and its actions to remediate the misconduct.”

Legal counsel can assist corporations in their analysis of whether to self-report and when.

As the tide of customs and trade fraud enforcement rises, planning ahead could make the difference between demonstrating corporate compliance and facing criminal consequences.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jay Schleppenbach is partner at Shook, Hardy & Bacon’s Chicago office focusing on white collar criminal defense and investigations.

Arianna Berg is senior counsel at Shook, Hardy & Bacon in Los Angeles.

Matt Bernstein is partner at Shook, Hardy & Bacon’s Miami and Washington, D.C., offices.

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