The Trump administration has exhibited an almost singular focus on international trade in the president’s second term, with tariffs as its go-to instrument to bend foreign countries to its will. But a tariff strategy is only as good as its collections mechanism. And currently the U.S. is limited in its ability to go after foreign-based bad actors looking to circumvent the system and evade duties.
Since April, the government has demonstrated its determination to collect every penny it is owed. When the U.S. Justice Department outlined its top 10 priorities for prosecuting white collar crimes, customs and trade fraud ranked No. 2 with a specific mention of tariff evasion. Then in August, the Departments of Justice and Homeland Security partnered on a Trade Fraud Task Force, which in part is designed to “aggressively pursue enforcement actions against any parties who seek to evade tariffs and other duties.”
Still, the U.S. allows foreign entities with no ties to the country to act as importers of record, which represents a major enforcement loophole.
As it stands today, it’s easy for shell companies to set up operations, commit fraud and close up shop before reemerging as a new entity to start all over again. While the practice itself isn’t new, Liberation Day ratcheted up the number of bad actors looking to capitalize on the margin concerns of brands and retailers selling in the U.S.
In an effort to stem this customs fraud Wac-A-Mole, Senator Bill Cassidy, M.D., has introduced the Securing Accountability in Foreign Entries bill, or the SAFE Act. The bill is designed to “level the playing field for compliant companies” by requiring importers of record to meet new standards. They include:
- The importer must be a U.S. citizen or permanent resident
- The importer must have a physical location in the U.S. (virtual offices and PO Boxes do not qualify) with at least one owner or full-time employee who is a U.S. citizen or permanent resident
- Is based in Canada, Australia or a “covered country”
- Is an affiliate of a U.S. entity that has been in business for at least 3 years continuously, has at least 1,500 full-time employees here with annual gross receipts or assets in the U.S. less than $1 million and serves as the legal representative for the company
The bill, which has support on both sides of the aisle, is also endorsed by supply chain management and logistics company Flexport. Its founder and CEO Ryan Petersen called the proposed legislation “a common-sense standard” that would close a “huge enforcement gap.”
While Jorge A. Torres, president and U.S. licensed customs broker at Interlink Trade Services, acknowledges the need to rectify a situation that allows foreign companies to evade compliance and financial responsibilities, he noted it could come with unintended consequences, particularly for small brands and retailers.
In his experience, companies of this size often don’t have customs compliance departments or customs bonds. Instead, they work under delivered duty paid (DDP), which means the supplier handles clearing the goods and paying all associated duties. Under the SAFE Act, Torres said small companies would need to handle these steps in house when dealing with a foreign seller.
“There is no argument against having more controls for foreign companies acting as the importer of record, but you cannot put additional strains and burdens on smaller companies in the U.S.,” Torres told HGI.
The ‘DDP Trap’
DDP has been in the spotlight since the White House announced its tariff strategy back in April. Almost immediately, buyers were inundated by offers from suppliers promising to handle all product clearances and duty payments. But the deals were in fact too good to be true. In order to deliver on these cheap prices, these companies were often undervaluing or misclassifying the goods to secure lower duty bills.
It’s a practice that Bryan Martsching, director of business development for logistics solutions provider Laufer Group International, has been warning his clients about, particularly as he saw the number of bad actors adopting these terms rise.
“I’m not saying that all DDP transactions are inherently fraudulent, but the rapid rise in these transactions should be a warning sign that there is a different rule book for certain consignees who have switched to these terms to stay competitive, or in some cases, to stay in business,” he told HGI.
Martsching said his firm has lost business that formerly operated under FOB terms, when his customers were convinced to work with companies offering 30% or more savings under DDP. To him, that’s a clear red flag.
“The only way 30% savings can be achieved in this new tariff environment is for the shipper of the DDP transaction to misdeclare (undervalue) the goods to CBP,” he said.
Over time, things have gotten more creative.
Now Martsching is seeing so-called “modified DDP” in which the shipper takes responsibility for clearing the goods and paying the duties, but the consignee controls the freight as FOB. Not only isn’t this an established Incoterm, but Martsching said it poses even greater risks.
Ultimately, the Laufer Group advises clients to beware of what he calls “the DDP trap.”
Nicole Bivens Collinson, managing principal, operating committee, and international trade and government relations practice leader with Sandler, Travis & Rosenberg, said on her podcast that it’s too soon to know if the SAFE Act could pass.
“The bill’s fate remains uncertain,” she said. “The president reportedly does not intend to sign any bills into law until the SAVE America Act with the voter ID law is passed, so we’ll see.”
