Sew much fraud: Unraveling Alexis’ customs fraud scheme.
Double invoicing.
I struggle to think of any situation where creating a separate set of invoices would be a legitimate business practice. There’s just no legitimate reason to create a whole separate set of books.
When it comes to business practices, double invoicing is like the fashion equivalent of wearing socks with sandals—there's just no excuse for it. If you’re ever scrolling through your financial statements and see two invoices where there should be one, grab your magnifying glass because fraud is almost certainly afoot. While some companies may try to pass off double invoicing as a creative way to do business, it’s usually just a creative way to break the law.
Enter Alexis, the trendy fashion brand beloved by celebrities, including the Kardashians. Known for its chic designs and luxury garments, the brand was in the news recently for something less glamorous—tax evasion through an elaborate customs fraud scheme. At the heart of this fraudulent scheme was double invoicing.
Let’s break down exactly how this too fashionable to follow the rules brand pulled off its scheme.
The scheme
In the world of international trade, customs duties are a way for countries to regulate and tax imported goods. The duty is based on the declared value of the merchandise, which is supposed to be, wait for it, the actual value of the merchandise. But Alexis decided to give this system a makeover by submitting two sets of invoices.
Double invoicing: More is not always better.
One invoice showed the real price—what their customers were actually paying for those luxury goods. The other, a "decoy" invoice, showed a much lower value. This fake invoice was the one Alexis submitted to U.S. customs, meaning they paid significantly less in taxes and duties than they were supposed to. It’s a bit like buying a designer dress for $5,000 but telling customs you got it for $500. You can imagine how that kind of thing could add up quickly!
Misclassification: Dressing up the truth.
Alexis also engaged in another crafty tactic: misclassifying their products. U.S. customs uses the Harmonized Tariff Schedule of the United States (HTSUS) to determine the appropriate duties based on the type of product being imported. Instead of categorizing their clothing under the correct HTSUS classification, Alexis played a game of dress-up, misclassifying items to score lower duty rates. By doing this, Alexis further reduced their customs duties, shaving even more off their tax bill.
The Great Fabric Assist Dodge
Alexis also failed to apportion the value of "assists." In customs lingo, an “assist” refers to things like fabric, garment trims, or other materials that are provided free or at a reduced cost to the manufacturer and should be included in the value of the goods when calculating duties. Alexis failed to include these materials when declaring the value of their imports. So, not only did they get a tax break on the cost of their goods, but they also got away with underreporting the value of the materials that made those goods even more expensive.
Ultimately, Alexis, LLC admitted and acknowledged errors and omissions with respect to imported women’s apparel, and occasionally accessories, during the 2015 through 2022 period. Alexis, LLC admitted and acknowledged that it: (i) failed to apportion the value of “Assists,” in the form of fabric and garment trims, to the customs value of the imported merchandise, and that the value of certain “Assists” should have been included in the customs value; (ii) found, and thereafter corrected and reported to CBP other entry documentation issues including certain discrepancies between customs forms and the associated sales-related documentation; (iii) identified instances involving classification errors relating to sections of the textile chapters of the HTSUS; and (iv) identified entries with incorrect port of entry codes.
Section 301
As reported in The Sourcing Journal, although the wrongdoing didn’t start out during the Trump tariff era, there was an additional 7.5 percent Section 301 tariff applied, giving Alexis an added incentive to evade customs. Section 301 tariffs are trade measures imposed by the United States under Section 301 of the Trade Act of 1974, which allows the U.S. government to respond to unfair trade practices by foreign countries. These tariffs are designed to address violations of trade agreements or acts that are discriminatory or unreasonable, and they can be used to pressure countries to change those practices.
Key Takeaways
Double invoicing is always a red flag for fraud, and Alexis used this trick to avoid paying full customs duties.
The brand misclassified their goods to reduce their duty obligations and failed to report the true value of assists like fabric and trims.
The penalty
Alexis, LLC paid a total of $7,691,999.63 to the United States to resolve this matter. Alexis, LLC, and its senior management fully cooperated with the United States’ investigation.
As the Importer of Record, Alexis, LLC acknowledged and accepted responsibility for these errors. Alexis, LLC’s senior management worked with their expert trade counsel to implement a robust set of internal and external procedures and corrective actions to prevent any future violations, ensure accurate reporting moving forward, and apply rigorous discipline to its import protocols. As part of the settlement, Alexis, LLC, and its senior management represented that they seek the highest level of import compliance as a corporate goal.
The whistleblower
The whistleblower was employed at Alexis from November 2021 through April 2022. On May 3, 2022, the relator formed the LLC “CABP Ethics and Co.” in Delaware to remain anonymous. They’ll collect some part of the government’s recovery. Under the qui tam provision of the False Claims Act, a private party (also referred to as a whistleblower or relator) may file an action on behalf of the United States and receive a portion of the recovery, typically between 15-30%.
If you think you’ve observed fraud or misconduct, we can evaluate your options. Vivek Kothari is a former federal prosecutor who represents whistleblowers. For a free consultation, contact Vivek by email, phone, Signal, or fill out the contact form.
Image source: Averyaudio, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons