Tariff and customs turmoil may pose the next big freight fraud risk

The unleashing of tariffs on a vast array of U.S. imports has raised the risk of customs fraud among all segments of the freight transportation supply chain, according to a fraud and compliance expert.

Kirti Reddy, a partner with the law firm Quarles & Brady and a former assistant United States attorney for the Southern District of New York, said the speed and size of the new taxes on America’s trading partners will likely generate a higher number of cases prosecuted under the False Claims Act.

“Any time there are trade disruptions, the fraudsters may prey on the vulnerabilities of the rapid change and take advantage of the situation,” Reddy told FreightWaves in an interview.

“Especially with the tariffs being so steep, companies and individuals might be inclined to figure out how they’re going to meet their costs by reporting something lower than what’s actually there. With such rapid change, entities might believe customs, at least initially, is going to have a difficult time keeping up.”

Fraud and cargo theft in the supply chain has been an increasing concern for private companies involved in moving goods, notably among trucking companies, railroads and freight brokers.

The False Claims Act (FCA), on the other hand, deals with fraud perpetrated against the U.S. government. But customs fraud has not been a major focus of the FCA.

“When I started, no one in the U.S. attorney’s office was really doing customs fraud,” Reddy said. “It’s been increasing slowly and steadily, but not as much as health care fraud.”

That could be changing, she said.

“I expect there’s going to be an increase in fraud in the customs industry, and I expect the government is going to prosecute more importers under the FCA for customs fraud.”

With the sharp increase in tariffs and new reciprocal tariffs, importers may be tempted to avoid them by either underreporting the amount of the products being imported or purposely reporting a different country of origin that has a lower tariff.

“That would be a false claim, and then the government can prosecute you,” Reddy said. But the beauty of that law is that, because the government cannot catch everyone, they use the whistleblower aspect of the law to encourage the public to report to the government. If the government collects, the individual can get between 15-25% of that – which is a significant amount of money.”

Carriers at risk

While importers and customs brokers are more likely to be held directly liable in customs fraud cases, carriers can’t turn a blind eye, Reddy said.

“If a carrier has a partner that is blatantly committing some sort of fraud, you might want to stop business with them, because we expect an increase in enforcement under the FCA because of the sharp increase in tariffs.

“Your likelihood of liability is pretty low, but you might be needed as a witness or subpoenaed for documents, and you don’t want to be known as a carrier that is involved in an FCA case.”

The biggest and most recent FCA case against a freight carrier involved now-bankrupt YRC. The Defense Department, which claimed the LTL carrier had been overcharging for its services, settled with YRC in 2022 for $6.8 million.

CBP: Ready to step up

Despite personnel cuts across the federal government, U.S. Customs and Border Protection is “uniquely positioned to implement and enforce the President’s tariffs using all our enforcement and revenue collection authorities,” the agency stated in a press release earlier this month.

“Serving on America’s frontline, CBP strictly enforces all laws and Presidential directives to secure our economic sovereignty and is fully equipped and ready to collect duties owed for goods subject to tariff and small packages.”

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• House bill targets staged truck crashes
• Lawmakers look at expanding FMCSA’s power to rein in cargo theft

Click for more FreightWaves articles by John Gallagher.

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