DEEPER DIVES: Your Supplier Offered To Under Value Your Shipment

Good Morning,

First, as always, thank you for joining.

I decided to keep this week’s newsletter to one focus. That’s the impact and risks you can face if you choose to take up a supplier on their offer to undervalue your shipments.

I am sure most of you understand at a macro level that this is illegal, I get into all of the nuts and bolts that you need to know.

This is an edition of the newsletter that is a pure PSA and I encourage you to forward it to anyone and everyone in your networks that might be put in the position of having to deal with this ‘offer’

Here’s what this issue brings:

• Are you worried your eCommerce brand or small to medium retail business is going to collapse because of tariffs? Have you had suppliers offer to “reduce the impact” of your import costs through undervaluing your goods? This is EVERYTHING you need to know about the risks you face if you say yes

No Matter How It’s Presented (Or Who You’re Told Is Doing It), It’s Fraud

The latest activity as a result of the US tariffs is starting to hit the news.

Fortune reported that they got a hold of emails and WeChat messages from suppliers in China that are suggesting illegal workarounds in order to keep their customers happy and goods moving out of their factories.

"Many US companies use a lower value invoice to make customs clearance to reduce the tariff," one supplier wrote to a U.S. household goods brand.

"We can revise the declared value on commercial invoices to help duty costs," another said.

Others are proposing DDP shipping (Delivery Duty Paid) so that they are the ones responsible for the tariff charges - implying that they will be the ones to make the actual declaration of value. Their goal is to make a brand feel more comfortable because they are the ones committing the fraud, as opposed to the brand directly.

No matter which way you slice it, all bad.

While I think it’s common knowledge that there are consequences to this type of behaviour, there are a ton of small brands/businesses out there that feel like their back is against the wall.

They don’t have the money to support wild tariffs to their supply chain and if they can’t get their merchandise into the country, they are doing out of business anyway.

Talk about a brutal position to be in.

Here’s an overview of the risks of engaging in this activity yourself, or taking a supplier up on their offer to do it for you.

Legal Obligations

The accurate declaration of value for goods imported into the United States is a cornerstone of customs compliance.

The declared value forms the fundamental basis upon which U.S. Customs and Border Protection (CBP) assesses duties, collects trade statistics, and ensures adherence to trade laws and policies.

The legal responsibility for providing this accurate value rests squarely on the Importer of Record (IOR), who must exercise diligence in understanding and applying valuation rules.

If you under-declare the value of imported merchandise as a strategy to mitigate tariffs, there is no question that this practice is unequivocally illegal under U.S. law and constitutes a serious form of customs fraud.

undervaluation exposes businesses and individuals to a host of severe consequences.

The determination of the value of imported goods is not arbitrary but is governed by specific U.S. laws and regulations designed to ensure fairness, predictability, and consistency, aligning with international standards.

Product Valuation

The primary statute governing the appraisement of imported merchandise is Section 402 of the Tariff Act. This legislation reflects the principles of the WTO Customs Valuation Agreement, promoting a fair, uniform, and neutral system for the valuation of goods for customs purposes.

It’s important to know that U.S. law establishes a strict hierarchy of valuation methods that must be applied in sequential order. A subsequent method in the hierarchy can only be used if the value cannot be determined under the preceding method.

Valuation order:

1. Transaction Value of Imported Merchandise

2. Transaction Value of Identical Merchandise

3. Transaction Value of Similar Merchandise

4. Deductive Value

5. Computed Value

6. Fallback Method (Derived/Reasonably Adjusted Value) - If none of the preceding methods can establish a value, a value is derived using reasonable adjustments to one of the previous methods

Note: Importers have the option to request the use of the computed value method before the deductive value method, provided the request is made at the time of entry summary filing.

The Customs Modernization Act ("Mod Act"), enacted in 1993, fundamentally shifted the legal burden of compliance onto the importer. It established the standard of "Reasonable Care", requiring importers to exercise the degree of care that a prudent person would exercise in the same circumstances when providing information to CBP.

Legal and Financial Implications of Under-Declaring Import Value

Under-declaring the value of goods imported into the United States to reduce tariff impact is a serious form of customs fraud that carries significant legal, financial, and reputational consequences.

Undervaluation is the act of declaring a value for imported merchandise that is lower than the customs value required by law, as determined according to the methods prescribed in 19 U.S.C. § 1401a.

Undervaluation can happen in various ways. Anything from a simple error to intentional fraud.

Here are the most common ways this is happening:

• Double Invoicing
  Creating two sets of invoices. One showing the true, higher price for payment between buyer and seller, and a second, fraudulent invoice showing a lower price specifically for submission to CBP to reduce duties.
  

• Omission of Dutiable Additions
  Failing to declare or deliberately undervaluing mandatory additions to the price actually paid or payable.
  
  This includes things like design work done by the manufacturer, royalties, licensing fees, commissions, etc
  

• Misrepresentation of Goods
  Falsely describing the merchandise's nature, quality, or specifications to justify a lower declared value.
  

• Abuse of De Minimis Threshold
  Illegally structuring or splitting larger shipments into multiple smaller ones to falsely claim eligibility for duty-free entry under the Section 321 de minimis value threshold (currently $800).
  
  This is one that may start to get more attention and “suggestions” as rules around Section 321 continue to change and reduce
  

• Misrepresenting Terms of Sale
  Falsely stating the terms of sale to improperly exclude certain costs from the declared value.

Legal and Financial Penalties

Now that you have an understanding of the responsibilities of an importer, and all of the ways that you are expected to make your declarations (and where the suggested avoidance strategies land), let’s get into the impact to you and your business.

Anyone considering these types of actions is likely already in a bad place.

And anyone suggesting to commit fraud is more concerned about their benefits and their cashflow than your business - make no mistake about it.

Manufacturing partners in different parts of the world may feel like they have very little risk and that making these offers to their customers is better than losing the business overall.

But if your business is the one that will bear the burden, here’s what you need to know about what can happen.

Section 1592 serves as CBP's main civil enforcement mechanism to ensure compliance with customs laws regarding entry documentation, including valuation, classification, and country of origin.

The statute's reach is broad, applying to any "person" who commits the violation, aids or abets it, or attempts it. This can include the importer of record, customs brokers, agents, consignees, or even individuals within a company involved in the import process.

A critical aspect of § 1592 is that penalties can be assessed "without regard to whether the United States is or may be deprived of all or a portion of any lawful duty, tax, or fee". This means that even if the undervaluation did not result in lost revenue (e.g., for duty-free goods), a penalty can still be imposed for the act of making the false declaration itself.

When it comes to civil penalties, there are three levels of culpability that are available to CBP to assess the situation and level of severity which pair with whether or not there was a loss or revenue or not.

1. Negligence
   
   A failure to exercise "reasonable care" in complying with customs requirements.
   

2. Gross Negligence
   
   A higher degree of fault than simple negligence. It is characterized by "actual knowledge or wanton disregard" for the relevant facts or legal obligations.
   

3. Fraud
   
   This is the highest level of culpability, defined as voluntarily and intentionally committing the violation.
   

Penalties

When Civil Violations Become Criminal

Customs undervaluation can also result in criminal prosecution.

The line between civil non-compliance (the information I detailed above) and criminal fraud often involves the element of intent.

When evidence suggests that undervaluation or other false statements to CBP were made knowingly and willfully with the intent to deceive the government and evade duties, authorities can choose to pursue criminal charges.

• Providing false statements on customs declarations can result in imprisonment for up to two years and/or fines

• Criminal prosecution often involves charges of conspiracy, smuggling, or wire fraud in addition to customs violations

• Criminal statutes, including § 545, often include provisions for the forfeiture of the merchandise involved in the violation or assets equivalent to its value

• Courts typically order defendants to pay restitution to the government for the full amount of duties, taxes, and fees lost due to the fraud

Other Risks Beyond Criminal Statutes

The False Claims Act (FCA), 31 U.S.C. § 3729 et seq., represents another weapon against customs fraud.

The FCA imposes liability on any person who knowingly submits false claims to the government or engages in actions to improperly avoid paying money owed to the government.

Importers can face "reverse" false claim liability for evading money owed to the government. Penalties include triple damages plus up to $28,619 per false claim. Each individual customs entry can constitute a separate violation, causing penalties to accumulate extremely fast.

Outside of everything that I have listed so far, there are a few other types of administrative impacts that an importer found making false declarations can face.

• Seizure of the imported goods

• Loss or suspension of import privileges

• Revocation of trusted traveler program memberships like Global Entry or NEXUS

• Increased scrutiny, more frequent inspections, and longer processing times for future imports

• Requirement to pay storage fees for seized goods

DDP Shipments

Even when a foreign supplier agrees to ship goods under Delivered Duty Paid (DDP) terms and assumes responsibility for customs clearance and duties, the U.S. buyer remains legally exposed if that supplier commits customs fraud

U.S. customs law (specifically 19 U.S.C. § 1592) holds any party involved in introducing merchandise into the U.S. accountable for false declarations, not just the importer of record.

This means that if the U.S. buyer is the owner, purchaser, or ultimate consignee, and fails to exercise "reasonable care", they may face civil penalties, criminal investigation, and operational delays, even without direct involvement in the fraud.

The risk is even higher because DDP creates a false sense of security. Buyers often rely on suppliers to handle imports correctly, but U.S. law still requires buyers to verify valuation accuracy and maintain oversight.

Violations can result in harsh financial penalties (up to the full domestic value of the goods), audits, cargo holds, and brand reputation damage.

To mitigate these risks, buyers must implement strong contractual protections, conduct due diligence on suppliers, verify customs entries, consider alternative Incoterms like DAP or FCA, and proactively correct past violations through the Prior Disclosure process.

Closing

The message is clear.

Don’t try to take shortcuts.

Even feeling a crazy strain on your business, there will only be even more scrutiny when it comes to imports from other countries given the current global trade climate.

One violation can not only destroy your business, but can destroy your life.

It’s not worth it.

That’s it for this week. Thanks for being here.