Uncle Sam is coming for Temu – and whistleblowers may be, too

Are you a business owner? Do you shop online for products for your business? Then like hundreds of millions of others, you’ve been blasted with ads from Temu, an e-commerce giant with roots in China, hawking products at prices you can’t believe. Need to source some beauty and health products for resale? Looking for plain T-shirts to screenprint the latest designs onto? Temu, Shein, and other ultra-cheap online behemoths are the answer.

A big reason these retail platforms thrive is a loophole in US customs laws called the de minimis exemption. That rule has two features. Most importantly, it allows goods with a retail value of 800 dollars or less per shipment to enter the US duty-free. For Temu, that means skirting steep US tariffs that would otherwise be imposed on its Chinese products. The rule also lets de minimis shipments enter the US with less information than other imports. That can make it harder for the government to detect and block illegal or unsafe shipments—or, seen from the other side, make it easier for importers whose goods don’t comply with, say, US health and safety or consumer protection laws to get the goods in.

Importers’ reliance on the de minimis rule has exploded in the past decade. Ten years ago, 140 million packages entered the United States annually under the de minimis rule. Today, there are over one billion packages a year. And packages from China outnumber those coming from all other countries combined.

US government proposes new rules to eliminate de minimis treatment

A few weeks ago, however, the Biden administration moved to stem that tide. It proposed new rules to eliminate de minimis treatment for any product subject to most US tariffs on Chinese products. It also proposed to increase information collection, so the government has greater visibility into de minimis shipments.

As a whistleblower attorney, I know the de minimis rule has long been subject to abuse. Using the False Claims Act, the government’s chief weapon to fight fraud against taxpayers, whistleblowers have exposed many schemes by importers trying to take advantage of the exemption. For example, my colleagues represented a former employee of a British luxury knitwear retailer called Pure Collection, who reported to the government that the company routinely split US-bound orders into separate shipments to keep the shipment value under the de minimis threshold. In 2018, Pure paid nearly one million dollars to resolve those allegations. A year later, a different British womenswear retailer, Selective Marketplace, paid over 600,000 dollars to settle allegations that it engaged in similar misconduct.

These examples are not exhaustive of the scenarios in which importers abuse the de minimis exemption or otherwise employ fraudulent practices to avoid tariffs. The most common types of customs fraud involve undervaluing imported goods, misrepresenting their country of origin, or misclassifying them by falsely describing the goods to evade the duty amount owed.

The federal government relies on whistleblowers to expose customs fraud. Whistleblowers who do so by filing a False Claims Act lawsuit can obtain rewards that range from 15 to 30 percent of the money the government collects. Well-placed whistleblowers who have brought successful cases to stop customs fraud have received millions of dollars for their efforts.

The proposed changes to the de minimis exemption will fundamentally disrupt the business model of Temu and other online behemoths that rely on the rule. These businesses will face enormous pressure to find new ways to compete. And the lure of skirting duties unlawfully may be hard to resist. But the government’s own enforcement efforts, supercharged as they are by False Claims Act whistleblowers, severely heighten the risk of getting caught. With so many well-placed tipsters, it may not be long before the light shines.