Corporate Identity Theft and the Limits of Prior Disclosure

Corporate Identity Theft and the Limits of Prior Disclosure

Rarely does a single hole sink an entire ship, and never has that been more true than in the mini case study we have for you today. There are many valuable issues tackled in this one, including:

  • Is corporate identity theft a real thing?
  • What is a prior disclosure at Customs actually for, and what it is not. 
  • What are the risks of disclosure if it is incorrectly applied?
  • And the importance of selecting security-focused business partners.

These lessons were hard learned by the company we’re about to discuss today, and their struggles stand to be your gain. 

As always, the company names and their imports have been changed in the spirit of moving onward and upward, but rest assured that the events detailed in this story are relatively recent - in the past five years - and, as such, are still highly relevant to today’s importers. 

Without further build-up, today’s blog post is about the strange case of Quack’s Wax and what can happen when you do what you think is right without leaning on expertise.

An Innocent Beginning

Quack’s Wax is a modest importer of wax-based products from China. Up until this point, they have had a smooth and effortless relationship with their suppliers, but the situation turned on its head when it was revealed that the US has begun assessing safeguard duties on wax imports from mainland China. With these new safeguard duties, Quack’s Wax was in a tough spot and began seeking new suppliers. 

It is rare for a case study to have a ‘villain,’ but sure enough, at this point in our tale, along comes a genuine rogue. One of Quack’s Wax’s suppliers offers them a solution - instead of finding someone new, they offer to assume the responsibility of importing the goods and negotiate a new price on the imported wax. 

A theme that will run throughout this case study and one of the bullet points in this presentation is that you must ensure that the people you work with are trustworthy. Do your homework, and make sure they are doing the same. It will be worth it in the long run.

Overly trusting and perhaps a bit naive, Quack’s Wax agreed to what would be revealed as a bad-faith proposal and a new Delivered Duty Paid arrangement was quickly set up. Or, that’s what they said. The seller SAID it would be DDP, but instead, they didn't act as the importer of record and merely pretended to need a Power of Attorney (POA) for warehousing. Instead, they used the newly granted POA to arrange for the release of goods not even associated with the wax company! 

The First Hole - A Lapse of Attention

If that was setting off alarm bells in your mind the whole way through, you are on the right track because it was a sophisticated scam referred to as ‘Corporate Identity Theft’ and is more common than you think. Quack’s Wax was soon contacted after an audit found over 60 imports made without duties or taxes paid, and a further internal investigation revealed that the number was closer to hundreds of imports happening entirely without Quack’s Wax’s knowledge. 

The first hole in this sinking ship was Quack’s Wax’s lack of due diligence regarding their imports. If a reputable broker had been involved, like the team we have here at PCB, Quack’s Wax would have been contacted directly by the Customs broker and asked a series of verifying questions well before it ever got to this stage. 

For the interested, Customs and Border Protection lays out best practices for dealing with a POA on their site.

It’s not clear if Quack’s Wax didn’t use a broker or if they went with one that was not as attentive, but a sharp-eyed broker can go a long way to identifying corporate identity theft of this nature well before it ever hits the millions. 

The Second Hole - The Power of Attorney

You may also find those alarm bells ringing for a different reason—the execution of a POA is standard practice in business dealings, including Customs brokerage. It allows a named actor to make decisions and operate on your behalf in a legal capacity. It is a process that should always be undertaken with seriousness and granted the full extent of your attention and protocols before agreeing to it. 

For example, at PCB, we take this process incredibly seriously precisely because corporate and personal identity theft is a constant and looming possibility. Our team has earned a reputation for being overly cautious in our dealings regarding acting on a client’s behalf, requiring a host of corroborating documentation along with a confirmation of your corporate identity every year. In fact, we regularly have to pass up business over how seriously we take this validation process. 

Unfortunately, whoever released the goods here did not validate that POA and did not protect the importer, and now Quack’s Wax is in trouble. Before we move on, consider what you would do in this situation. According to the audit, Quack’s Wax owes millions in duties, fees, and penalties, and they are currently the business entity responsible for these admittedly erroneous imports. You may be tempted, as Quack’s Wax was, to guess ‘prior disclosure.’ Unfortunately, as our protagonists are about to discover, that was the wrong choice for a host of reasons.

The Third Hole - A Prior Disclosure Done Post

There are many ways to engage with CBP when errors or fraud are discovered, and it is important to work with qualified trade professionals who can advise you on the best course of action for your given concern. In this case, the right intent was made but in the wrong way, which only increased the mounting issues for Quack’s Wax.

For those unfamiliar, a prior disclosure is when a business entity notices and attempts to correct an error in their submitted entries BEFORE Customs detects it in a formal audit. Typically, the importer is only on the hook for the interest on the unpaid duties and what is determined to be the loss of revenue from that discovered error. Not only was this prior disclosure made after the results of the audit, but prior disclosure was designed with the importer taking responsibility for those errors in mind. 

In the commanding majority of cases, the fact that a prior disclosure is an admission of guilt for those errors is largely obvious and a given, but in our case, it couldn’t be more relevant. What Customs determined to be the loss of revenue came to around $10 million, and whether they meant to or not, Quack’s Wax’s innocent submission of prior disclosure inadvertently claimed responsibility for it.

Quack’s Wax had no intention of paying anything for this. None of the imports were made with their knowledge, and after some negotiations, Customs dropped the number down to around $5 million. Quack’s Wax was unmoving, and after several long periods of debate, the US government decided to take the matter to court, suing Quack’s Wax for the missing revenue. 

Sunk - But We Have An Expensive Life Preserver

The US Government would argue that by using prior disclosure, Quack’s Wax was on the hook for the loss of revenue on the imports, and the fact that they used prior disclosure indicated an admission of guilt, given, in fairness, that is typically what prior disclosure is for. 

Fortunately, the courts found in favor of Quack’s Wax for reasons that should, hopefully, be obvious. They were clearly the victims of a crime and had unfortunately reported that crime through the wrong process. The courts decided that an error in reporting shouldn’t make them liable for millions of dollars, and the whole thing was dismissed - a happy ending…sort of. The proceedings were long and expensive for Quack’s Wax, and, worst of all - they were entirely unnecessary.

The first key point we can take from this case is that consistency in monitoring and accountability for your import records is vital, even with a broker. In addition to tracking what is happening on your bond and checking your entries, an annual review is a great way to ensure that, among other benefits, millions of dollars of illegally imported goods are not falsely being attributed to your name. We recommend providing your broker access to your ACE Portal so that they can monitor all imports under your importer number and notify you if any anomalies appear. Alternatively, we recommend obtaining a continuous transaction bond over a single transaction bond, as the former can act as a list of all transactions that your broker can review on an annual basis.

Secondly, do your homework on your service providers. Know who you are working with and that they have your best interests at heart. Your service providers should be your partners, and you should feel like they are invested in your success. For example, do they have the stellar reputation for compliance and thoroughness that PCB has? If not, what safeguards do you have in place to protect your business? 

Finally, ensure that you understand the ins and outs of the processes you choose to use. Prior disclosure is for a specific use time and window of opportunity. Quack’s Wax could have avoided a lot of money and headaches by reporting the fraud through the correct channels instead. 

For any additional questions, concerns, or help regarding POAs, prior disclosures, trade lawyer recommendations, or anything related to the complex world of importing, we encourage you to contact our Trade Advisory and Compliance team today.

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About Author
Breanna Leininger

Breanna has been in the industry since 2004 and has dealt with clearances and compliance concerns for a multitude of commodities for all ports of entry and all modes of transportation. She has a Bachelors in Communications, Bachelors in Political Science & Government, is a Licensed Customs Broker as well as Certified Customs Specialist. Breanna has been asked to be the speaker in a variety of events including the BC Agriculture Show, Doing Business in the US seminar and has been a contributor to Small Business BC publications. She was recently nominated for the NCBFAA Government Affairs Conference Emerging Leaders and Mentors by the NBCBA. She participates in the Northern Border Customs Brokers Association and the NCBFAA annual conferences in Washington, DC. Breanna has a deep passion for politics, global affairs, and how communication shapes policy and international business relationships. She feels very fortunate to work in an industry that allows her to take part in how policy impacts the global economy and domestic businesses of all shapes and sizes.

While we strive for accuracy in all our communications, as the Importer of Record it is incumbent upon your company to ensure that you are aware of the requirements under the new regulations so that you maintain compliance as always.
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