Customs Undervaluation – It’s a Crime


Customs Valuation is a procedure to determine the customs value of imported goods. The customs value is essential to calculate the total duty to be paid on an imported good. As part of its agreement with the World Trade Organization (“WTO”), the U.S. is part of an internationally standardized system of valuing imports. This standardized system allows for CBP to protect revenue, ensure reasonable care from importers, and accurately calculate Census trade statistics. Accordingly, it is critical to declare the value of importations accurately and compliantly. 

The U.S. Customs and Border Protection (CBP) valuation methodology (as well as a summary of relevant Customs rulings) are described in detail in the Valuation Encyclopedia (i.e., the best resource on valuation inquiries). CBP permits merchandise to be valued according to one of the six valuation methods listed below. The methods are applied sequentially from first to last until an applicable value is determined. If the first method does not apply, the importer must then evaluate the second, and so on, until an appropriate method applies. The only exception to this sequential evaluation requirement is when evaluating between deductive value and computed value – an importer may choose to use the computed value before the deductive value.

Methods of Valuation:

  1. The transaction value of imported merchandise (the majority of imports use transaction value – i.e., the price paid or payable plus assists (see below))
  2. The transaction value of identical merchandise
  3. The transaction value of similar merchandise
  4. Deductive value
  5. Computed value
  6. Fallback

Detailed information on how each of the valuation methods above are applied is explained in our blog article, Customs Valuation 101.

What is “Undervaluation”

As is the case with many aspects of the law, there are those who don’t comply. There have been numerous high-profile incidents of importations being undervalued to purposefully reduce the amount of overall duties paid. In these cases, typically, the supplier provides two sets of invoices; one for purposes of receiving payment from the buyer, and one for CBP (i.e., for reporting the “transaction value”). Two sets of invoices is clearly fraudulent and can result in both criminal (imprisonment/fines) and civil penalties.

Case Study: Motives Far East and Motives China Limited

A China-based clothing manufacturer was penalized $13.4 million for engaging in fraud by maintaining two different sets of invoices, as part of a civil settlement brought by U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) and CBP. The manufacturer admitted to underreporting the value of imported merchandise. The lawsuit was brought under the False Claims Act. Read more about double invoicing here.

Case Study: United States ex rel. v. Stargate Apparel, Inc., Rivstar Apparel, Inc., and Joseph Bailey

In another similar case, certain clothing companies and their former CEO settled for $6 million with the U.S. Department of Justice after admitting to engaging in fraudulent schemes involving use of false and inaccurate invoices. According to the Government’s allegations, these companies employed a variety of schemes to defraud the United States by submitting invoices to CBP that falsely understated the true value of the clothing that they imported into the United States in order to avoid paying millions of dollars in customs duties.

Case Study: United States ex rel. Icolari v. Eos Energy Storage

Eos Energy Storage is a New Jersey based, publicly traded company that creates and distributes batteries to power companies. The company recently reached a $1.02 million dollar settlement with the United States Department of Justice, serving on behalf of Homeland Security and CBP for “…failure to declare the true and collect value of the merchandise for which it was the importer of record.” Eos purchased components to build its batteries from third parties in the United States or elsewhere and then would offer those components to a foreign manufacturer responsible for assembling the batteries. Once the batteries were assembled, Eos would import them back into the United States. The infraction occurred when Eos failed to provide the true and correct value of the “assists.” Assists are items or services supplied at free or reduced cost by the buyer of an imported merchandise for use in connection with the production or sale for export to the U.S. of that merchandise. This infraction proved costly and led to Eos ultimately settling with the U.S. government in lieu of a lengthy litigation process.

Case Study: United States ex rel. v. Queen Apparel

QUEEN Apparel is a now defunct New York City-based clothing importer and manufacturer, solely owned by Hank Hyuncho Choi. When in business, QUEEN made and imported garments for third party seller who would sell the garments in American department store chains. The company reached a $50,000 settlement in 2021 with the Southern District of New York for knowingly evading customs duties on imported goods. As part of their settlement, QUEEN has admitted to knowingly undervaluing their imported garments to evade paying customs duties. Though no longer in business, this company serves as an example as to the repercussions that can arise from undervaluing imported goods.

What You Can Do

  • Evaluate your valuation practices – It is always a good idea to take the opportunity to evaluate which of the above valuation methodologies you use to report your import value to CBP. Taking a closer look at your valuation practices can provide opportunities for duty savings (like first sale discussed below) and also alert you if you have been inadvertently violating Customs law, (for example by supplying an assist to your supplier without including it in your customs value). Diaz Trade Law and its consultants, which include former customs import specialist and auditors, remain available to review and evaluate your valuation practices.
  • Understand the impact of your related party relationships – If you, as the importer, are purchasing merchandise from a related party, (as defined in 19 U.S.C. §1401a(g)), then you have additional valuation-related responsibilities. If you determine that your relationship is, in fact, a related party relationship, then you must report the related party relationship on your entry summary. Furthermore, you must evaluate whether transaction value may still be used when parties are related. The transaction value for related parties may be used when there is an arms’-length transaction between the parties. An arms’-length relationship is demonstrated to CBP via one of two tests: (1) the circumstances of sales test, or (2) the test values test. The circumstances of sales test requires an examination of whether the sales price enables the seller to recover all of its costs plus a profit equivalent to the firm’s overall profit (all costs plus a profit). Alternatively, under the test values, a related party transaction value may be acceptable if the value of that transaction closely approximates one of the following:
    • (i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States;
    • (ii) the deductive value or computed value for identical merchandise of similar merchandise;
    • (iii) but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.
    • The purpose of the two related parties tests is to ensure that the customs value reflects the true value of the transaction between the buyer and seller (i.e., that the relationship between the parties did not influence the price).
  • Ensure you are correctly classifying your imports – In order to exercise your duty of reasonable care, it is important, that to appropriately classify your import based upon the Harmonized Tariff Schedule of the United States (“HTSUS”). Properly classifying your import has important valuation implications because duty rates and other taxes and fees differ based on which HTSUS you are declaring. If you are unsure how to classify your product, Diaz Trade Law can assist you in determining your appropriate classification, or assist in submitting a binding ruling request, if necessary.
  • Consider utilizing the First Sale Rule, if applicable – Sometimes, a transaction involves three parties – a foreign manufacturer, a reseller/middleman, and a U.S. importer. In such circumstances, U.S. customs valuation law permits importers to use the price paid or payable in the sale between the foreign seller and reseller/middleman rather than the price paid or payable in the sale between the reseller/middleman and the U.S. importer. In other words, the “first sale” rather than the second sale is used. Effectively utilizing the First Sale Rule can result in a lower transaction value, which can in turn result in a lower duty amount paid. In order to use first sale, the burden is on the importer to demonstrate to CBP that the imported merchandise should be valued based on the first sale rather than the second sale, and all of the following must apply:
    • The first sale must be a bona fide sale from the manufacturer/seller to the middleman;
    • Merchandise must be clearly destined for the United States at the time of the first sale;
    • The first sale price must be an arm’s length price; and
    • Statutory additions to the price actually paid or payable must be included in the first sale price.
  • File a prior disclosure – If a company or individual believes it has violated the law by making material false statements in connection with their importations (i.e., undervaluing by not declaring an assist), and CBP is unaware of this violation, proactively and voluntarily disclosing the potential wrongdoing via a Prior Disclosure can substantially reduce penalties. CBP encourages proactive import compliance, including the submission of PDs by parties who believe they may have violated 19 U.S.C. § 1592. According to CBP, “Both CBP and the importing/exporting community have a shared responsibility to maximize compliance with laws and regulations.” Details on CBP’s PD program are available in CBP’s publication, What Every Member of the Trade Community Should Know: Prior Disclosures. If a company or individual suspects it has violated 19 U.S.C. § 1592, the importer can proactively inform CBP to benefit from the possibility of mitigated penalties offered by a PD. Delaying submission of a PD could result in CBP notifying you that it is commencing a formal investigation, thereby preventing you from filing a PD.

Contact Us:

Diaz Trade Law has significant experience in a broad range of import compliance matters including customs valuation. To learn more about the services we offer, contact us at [email protected] or call us at 305-456-3830.



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