International Trade and Customs Practice
Lessons for Retailers:
Hong Kong Supplier Pleads
Guilty to US Customs Fraud
A third-party supplier to a major multi-channel electronic retailer pled
guilty in U.S. federal court to the criminal charge of intentionally defrauding
the United States of more than $1 million in customs duties. The supplier,
Fai Po Jewellery (H.K.) Co., Ltd. (“Fai Po”), was ordered to pay nearly $2 million
in criminal fines and restitution and placed on probation for a period of
According to the U.S. Department of Justice, Fai Po ran a double-invoicing
scheme under which it fraudulently evaded the payment of U.S. customs
duties by invoicing the U.S. purchaser for the true cost of the goods, while
enclosing with the shipments invoices that intentionally understated the
value of the merchandise (the merchandise involved was subject to high
U.S. duty rates). The invoices that accompanied the shipments were used
by an express courier/customs broker to clear the goods. As noted in the
U.S. Immigration and Customs Enforcement (“ICE”) press release, the U.S.
purchaser was not aware of the scheme (i.e., the U.S. purchaser was not the
importer of record) and did not benefit from it.
Implications for US Retailers
While the media and legal blogs have focused on the direct implications
for the foreign supplier, the case is also instructive for U.S. retailers.
In the retail industry, it is quite common for retailers to purchase
merchandise on “delivered” terms and to have suppliers be responsible
for importing the merchandise into the United States. Under such an
arrangement, the retailer generally does not receive copies of the entry
documents submitted to U.S. Customs and Border Protection (“CBP”),
as the supplier, or its designated customs broker, acts as the importer
of record of the merchandise. Although a U.S. retailer does not act as
the importer of record under such an arrangement and may, in fact,
have limited knowledge in connection with the information submitted
to CBP regarding the importation of the merchandise, such an
1 The retailer sued Fai Po for breach of contract in a related civil action.
The case was dismissed in November 2013 after the parties reached
arrangement does not shield the retailer from potential liability for duties
owed to CBP, as the retailer may still be the “ultimate consignee” of the
merchandise under U.S. customs law.
In addition, a U.S. retailer under such an arrangement may be exposed to
potential civil penalties under 19 U.S.C. §1592. In this regard, U.S. customs
law prohibits any person from entering or attempting to enter merchandise
into the United States by material and false statements or acts or by material
omissions, and from aiding or abetting a person to commit the foregoing
violations. See 19 U.S.C. §1592(a)(1)(A)-(B). U.S. courts have held persons
other than the importer of record liable for aiding and abetting fraudulent
violations of 19 U.S.C. §1592.
Actions to Consider
The lesson for U.S. retailers here is that arrangements with third-party
foreign suppliers to purchase merchandise on “delivered” terms do not
necessarily insulate the retailers from potential liabilities under U.S.
customs law. U.S. retailers who utilize such arrangements should review
agreements with their suppliers to ensure that the suppliers are required to
include invoices with each shipment of merchandise. In addition, retailers
should make certain their internal controls include procedures to review
their purchase orders against the suppliers’ invoices to ensure that the
prices match, as well as procedures for addressing any situations in
which the prices do not match.
U.S. retailers that recognize the risks associated with such arrangements
can take steps to minimize the likelihood of finding themselves in a situation
similar to that of Fai Po’s U.S. customer. Having documented internal controls
to address such risks and evidence that such controls are followed can also
reduce the risk of potential penalties under U.S. customs law.
We trust that the foregoing is helpful.
If you have any questions about the
review of supplier arrangements or
internal controls over this area,