California Apparel News

For years, U.S. customs officials have been playing a game of cat and mouse with apparel importers, trying to figure out who is undervaluing their goods to get out of paying higher duties.

That scrutiny could intensify now that U.S. Customs and Border Protection announced on May 1 that it plans to hire 2,000 new employees—including customs inspectors.

Those new employees will be sent to 44 seaports and airports around the country in cities such as New York, Los Angeles, Detroit, Houston, Dallas, Chicago, Las Vegas, and towns along the Canadian and Mexican border.

“Every time customs goes fishing for undervaluation, they find something,” said Robert Krieger, president of Los Angeles customs brokerage firm Krieger Worldwide. “New employees will be doing inspections and looking at valuation issues because it is extremely lucrative for the government to do that. There is a lot of improper declaration going on.”

Apparel, textiles and footwear have always come under the microscope because they have some of the highest tariffs in the United States—averaging about 16 percent per garment but with tariffs up to 32 percent. In fiscal 2012, textile import duties collected by customs officials totaled $12.4 billion, or 41 percent of all duties paid by importers to the government, according to CBP.

Most imported toys have no tariff as do a good deal of household furniture and computers.

For years, customs officials have been warning apparel and textile importers to ship their goods free on board, or FOB, which means the apparel importers are responsible for getting the goods cleared at customs. But the overwhelming majority of importers send their goods landed duty price, or LDP, which means the overseas manufacturer, distributor or agent is responsible for having the goods shipped and cleared at customs.

“I have seen an increase in scrutiny in the last couple of years and expect to see more in the next couple of years because customs has been authorized to hire 2,000 new officers,” said Tom Gould, senior director, customs and international trade, for international trade law firm Sandler, Travis & Rosenberg. “I would expect a significant portion of them to come to the West Coast.”

Often, when customs questions the valuation of imported apparel, people such as Gould are called in to help resolve the situation. “It can be tedious. In some cases, the companies will have to re-track five years worth of paperwork,” he said.

If companies want to avoid or reduce paying penalties and fines on top of the additional duty, they sometimes re-file the customs documents under the “Prior Disclosures” program. “If customs feels the company made a mistake and was not trying to defraud the government, they will suggest you file a prior-disclosure statement. You pay the full duties but don’t [always] pay the penalties,” Gould said. “Sometimes customs doesn’t want to put a company out of business but just wants to get the money they are owed.”

Gould warned that customs is getting more sophisticated in detecting undervalued goods. Customs inspectors sometimes visit overseas factories to ascertain they are actually making the apparel at the price declared on import documents.

Customs will obtain the original invoices and compare them to the invoices received at the U.S. border. Apparel companies that undervalue goods often have two sets of books or two different invoices for the same order.

This dual-bookkeeping system was seen in a recently resolved trial involving New York apparel maker Dana Kay Inc. and affiliates, which makes clothing for major retailers such as JCPenney, Ann Taylor, Sears and the Dress Barn.

It was not customs that exposed the clothing company for undervaluing goods but an employee who had worked as a garment cutter for Dana Kay since 2006.

In a U.S. District court trial, court documents said the “defendants employed two different sets of invoices for paying garment manufacturers versus reporting those payments to CBP.”

On average, Dana Kay was accused of undervaluing each garment by $2.50, saving 55 cents in tariffs per unit, the Justice Department maintained. The apparel maker was ordered earlier this year to pay $10 million to settle the false-claims case, prosecuted by the Department of Justice.

For exposing the wrongful undervaluation, the whistleblower received 23 percent of the $10 million penalty.

This kind of case opens another set of problems for apparel manufacturers undervaluing their garments.

“The False Claims Act has become more popular in the customs world in the last three or four years. There have been half a dozen cases in the last year,” said international-law attorney Larry Ordet of Sandler, Travis & Rosenberg.

False-claims cases are often initiated by a disgruntled worker, former employee or a competitor. “Under the False Claims Act, the penalties can be higher [than customs penalties],” Ordet said. “The Justice Department requests voluminous records. They will talk to people all the way down the chain, and it slows down your business.”

In addition, there are attorney fees to pay and lost production time. Ordet suggests that “companies make sure their compliance program is robust.”