Ending a legal saga that began in 2013 and involved an appeal to the Supreme Court, which declined to hear the case, the Department of Justice (“DOJ”) on March 11 announced that Ford Motor Company (“Ford”) agreed to pay $365 million to resolve penalties related to the customs misclassification and undervaluation of approximately 162,833 cargo vans imported into the United States. DOJ alleged that from April 2009 to August 2013 Ford engaged in a scheme whereby the company imported Transit Connect vans from Turkey with a “sham” rear seat to make these vans appear to be passenger vehicles rather than cargo vehicles. Per the DOJ press release, the rear seats “were never intended to be, and never were, used to carry passengers.”

The Misclassification Scheme

Ford’s alleged scheme may seem mundane if the duty rate for cargo vehicles was not an order of magnitude greater than the duty rate for passenger vehicles. Specifically, the duties imposed on “motor vehicles for the transport of goods,” classified under Harmonized Tarriff of the United States (“HTSUS”) code 8704.31.00, was 25%, while the duty rate for “motor vehicles principally designed for the transport of persons” (HTSUS code 8704.31.00) was 2.5%.

DOJ supported its claims that the rear seats were merely a “sham” by pointing out other aspects of the vehicles that exposed them as cargo vans merely posing as passenger vans. These features included:

• rear doors that were designed for ease of loading cargo;

• rear seats without headrests and certain wires that provide lumbar support;

• reduced-cost fabric covering the rear seats that were different from that covering the front seats;

• lack of a cargo mat;

• lack of side airbags, speakers, handholds, or vents behind the front seats; and

• an exposed metal floor in the back area.

The Settlement Agreement further alleged that upon import Ford immediately removed the rear seats and seatbelts, delayed affixing labels denoting the vans as two-seat vehicles, and temporarily mislabeled the vans as four-seat vehicles.

In separate Court of International Trade proceedings, the DOJ argued that the inclusion of the rear seat was “an improper artifice or disguise masking the true nature of the vehicle at importation,” and that Ford included the rear seat for the express purpose of lowering the duty rate.

Undervaluation Allegations

In the settlement agreement, the DOJ also alleges that Ford undervalued the Transit Connect vans in several ways, including:

• Errors related to the valuation of American Goods Assembled Abroad components;

• Incorrectly calculating deductions for non-dutiable charges;

• Using an improper exchange rate;

• Committing classification and deduction errors related to battery electric vehicle (“BEV”) status; and

• Not declaring applicable engineering and tooling costs.

Penalties and Other Settlement Terms

DOJ grounded Ford’s liability in violations of 19 U.S.C. § 1592, which allows for the recovery of owed duties and penalties when any person causes merchandise to be entered by fraud, gross negligence, or negligence through materially false statements or material omissions. (For more information on 19 U.S.C. § 1592, see our previous article, Import Violations: What You Need to Know about 19 USC 1592.)

Just over half of the of the $365 million settlement, or $183,476,539.62, constituted restitution to the U.S. government for owed duties. The remainder of the settlement amount constituted penalties. Ford is released from further 19 U.S.C. § 1592 liability for the conduct covered by the settlement.

For the next five years, Ford must also request prospective classification rulings from U.S. Customs and Border Protection (“CBP”) prior to the first imports of certain new or modified vehicles. Ford never admitted liability, but, as part of the settlement, Ford agreed to drop its litigation against the United States in the Court of International Trade.

Takeaways

• Seek a ruling from CBP. It is sometimes possible to obtain a favorable classification ruling that supports valid means of reducing customs duties. “Tariff engineering,” whereby a product is designed or manufactured in a certain way to qualify for a lower duty rate, is legally permissible in certain circumstances. But there is a tried-and-true method of obtaining CBP’s blessing for contemplated means of duty reduction: a prospective ruling request. In this case, a prospective ruling submitted to CBP regarding Ford’s manufacturing and post-importation plans for the vans would have given CBP the opportunity to advise Ford on the permissibility of the proposed classification. Such rulings are binding on both CBP and the importer. Per the terms of the DOJ settlement, Ford will be required to submit classification ruling requests for new imports of many vehicles over the next five years.

• Lower duties cannot result from the addition of an artificial piece. Although Ford’s litigation in the Court of International Trade was dropped as part of the DOJ settlement agreement, an interesting argument made by the Government was the allegation that the rear seat constituted a “disguise or artifice.” This argument was ultimately not addressed by the U.S. Court of Appeals for the Federal Circuit, but it serves as a reminder to proceed with caution for those attempting to engage in legitimate tariff engineering. There is abundant caselaw precedent that distinguishes between legitimate tariff engineering and evasion of duties by resorting to disguise or artifice. The difference between these two outcomes may be that between lawful importing and potential penalties for violations.

• DOJ has a dedicated Trade Fraud Task Force. DOJ’s Trade Fraud Task Force (“TFTF”) is not new, but the Ford settlement may be its most eye-catching activity to date. In December, the Congressional Select Committee on Strategic Competition between the United States and the Chinese Communist Party (the “China Select Committee”) recommended increased funding for the TFTF, which “investigates PRC transshipment, evasion of tariffs, trade-based money laundering, violations of the Uyghur Forced Labor Prevention Act, and other trade-related crimes.” DOJ enforcement of customs laws has increased in recent years, and the TFTF, along with increased enforcement of the False Claims Act for international trade violations, is a driving force in that increase.

If you have any questions about the Ford settlement with DOJ, tariff engineering, or customs violations, do not hesitate to reach out to the attorneys at Torres Trade Law.