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A client's double-invoice scheme: what must the broker do?

October 2024 examBroker ComplianceQuestion 3 of 80

While preparing the entry documents for a shipment on behalf of its client Angel Industries (Angel), Shady CHB (Shady) sees that the insurance value for the shipment is significantly lower than the commercial invoice value. In response to Shady's inquiry concerning the differences, Angel explains that there are two commercial invoices for the shipment. The first commercial invoice is the real invoice from the shipper which shows the lower amount that is used for insurance purposes. The second commercial invoice is created by Angel at a higher amount and is used as the invoice for calculating Customs value and upon which it pays the duties, taxes, and fees. Angel explains that it uses the two invoice system in its accounting records to reduce its reportable profit for income tax purposes. Shady's attorney advises Shady to terminate its relationship with Angel because the “double invoice scheme” is fraudulent. Of the choices below, what is Shady's best next step?

How to get there

19 CFR 111.32: False informationA broker must not file or procure or assist in the filing of any claim, or of any document … known by such broker to be false. … A broker also must document and report to CBP when the broker separates from or cancels representation of a client as a result of determining the client is intentionally attempting to use the broker to defraud the U.S. Government or commit any criminal act against the U.S. Government. The report to CBP must include the client name, date of separation or cancellation, and reason for the separation or cancellation.

Angel keeps two sets of invoices to understate its income for tax purposes. That's fraud against the U.S. Government, and the fabricated invoice would be a false document filed with CBP. Shady's attorney advises ending the relationship. When Shady does, § 111.32 requires it to document and report the termination. The answer is A.

Why the other choices are wrong

B) File at the real value and warn the client: correcting this one entry doesn't address a client known to be running a fraud scheme, and it skips the reporting duty that comes with terminating for that reason.
C) File Angel's value and keep the client: filing a document the broker knows is false violates § 111.32, and the fraud is against the U.S. Government (IRS), which is covered.
D) Overpaying duty isn't fraud: the invoice is still knowingly false, and filing it helps a tax fraud. That's grounds for discipline under § 111.53(c)–(d).
Tip
Since the 2022 rule: if you drop a client because they're trying to use you to defraud the government, you must document it and report the name, date and reason to CBP.

Sources: 19 CFR 111.32, 111.53 (eCFR).

CBP answer key: Answer A · 19 CFR 111.32; 19 CFR 111.53Source: CBP past exams ↗