Evading Remedies: Why The Marked Increase In Fraud In China-Related AD/CVD Cases Should Concern You

Tuesday, October 4, 2011 - 01:00

Foreign party fraud is rampant in many of the federal government's enforcement proceedings against imports from China under the antidumping (AD) and countervailing duty (CVD) laws. This is not to say that fraud taints all, or even most, AD and CVD proceedings against Chinese imports. But incidents of fraud in these cases have become legion.

Because Chinese imports covered by AD/CVD orders constitute but a fraction of all U.S. imports from China, some might question whether increased fraud in AD/CVD proceedings is cause for concern. However, many imports from China that are not subject to AD/CVD orders are nevertheless subject to other U.S. regulations - including those related to food and consumer-product safety - that are maintained for the benefit and protection of Americans. There is no question that dishonest traders of Chinese-made goods are avoiding these regulations through fraudulent schemes similar to those used to avoid AD/CVD orders. This portends real trouble for anyone in this country that buys or consumes goods made in China - which, of course, includes all of us.

Unfortunately, reducing the fraud that has become too common in AD/CVD enforcement proceedings against Chinese imports is more easily said than done.

Enforcement Proceedings Under AD/CVD Orders

Three federal agencies are charged with enforcing separate aspects of the AD/CVD laws. The U.S. Commerce Department (Commerce) determines whether imports are being "dumped" into this country ( i.e ., sold at prices below those in the country of manufacture or below the cost of production), or are being "unfairly subsidized" by the exporting country's government. If Commerce's determination is affirmative, the U.S. International Trade Commission (ITC) determines whether such unfair trading has materially injured the domestic producers that compete with the imports.

If both agencies issue affirmative determinations, Commerce issues an AD or CVD order, and subsequently conducts annual "administrative reviews" of the order to determine the exact amount by which new imports were dumped or unfairly subsidized. After each review, Commerce instructs the third government agency - U.S. Customs and Border Protection (Customs) - to bill the relevant U.S. importers the amount of AD or CVD duties determined by Commerce. These duties increase the price the importer originally paid for the imports to the non-dumped or non-subsidized price, thereby eliminating - or "remedying" - the injury to domestic producers that would otherwise result from the sale's original price.

Fraud In Commerce's Proceedings

Dishonest foreign exporters and U.S importers have two general opportunities to avoid the remedial effects of AD/CVD orders by submitting fraudulent information to the government. The first is during Commerce's original investigation, or its annual administrative reviews of an issued order, during which the agency determines the amount by which imports during the covered period were dumped or unfairly subsidized.

Commerce's determinations typically are based on information submitted by the imports' foreign producers and exporters that the agency has "verified" (audited) in the country of export. This information as submitted frequently includes unintentional mistakes, most of which are ultimately corrected. But there is always the possibility that a foreign producer or exporter will succumb to the temptation of intentionally submitting false data.

In fact, through 2000 Commerce rarely found that a foreign party had intentionally submitted false information in an AD/CVD proceeding. Since then, however, the number of such incidents has sharply increased. Not surprisingly, virtually all of these cases involve imports from China.

In one notorious case Commerce agreed to conduct the verification of a Chinese seafood producer in a hotel conference room on the pretext that the producer's office was too small.1During the verification a Commerce investigator discovered that a team was forging "records" for the producer in a guest room retrofitted with computers and other equipment. There followed much unpleasant shouting, pleading and threats, and a building-wide blackout obviously induced to force the verification team out of the hotel. Finally, the producer's U.S. attorneys announced that the producer was formally withdrawing from the verification and the administrative review, and refused to allow the Commerce investigators to leave the hotel until they surrendered all of the producer's information.

Less breathtaking - but more troubling and common - are incidents that involve forged or altered "documents of authenticity," which are intended to identify the facility in which the relevant goods were made and show that the goods comply with the referenced product standards. A good example is a "mill" certificate, which metal foundries have long used to record the chemical and physical qualities of each batch (or "heat") of metal they make.

In the recent CVD investigation of certain steel grating from China, a major issue was whether the sole participating Chinese grating fabricator had purchased subsidized input steel from mills owned by the Chinese Government.2Commerce ultimately rejected as unreliable (and likely fraudulent) all of the mill certificates the fabricator submitted to show it had purchased only non-subsidized steel from private Chinese mills. Commerce noted that many of the certificates reflected a chemical composition that differed materially from that of the steel used and that others improbably repeated the same obvious errors reported on certificates from other mills.

In other administrative reviews, Chinese exporters have been caught falsely certifying that they did not export covered merchandise to the United States during the relevant period, or were not related to any Chinese exporters that did.3Commerce also has caught schemes in which a Chinese exporter with a relatively low AD deposit rate unlawfully "licensed" it for a per-container fee to an exporter with a higher rate and then claimed in the review that the higher-rate exporter had used the exporter's lower rate without its permission.4Commerce also has caught Chinese companies in submitting false or altered commercial documents such as invoices, bills of lading, and credit/debit memos.

Fraud In Customs' Proceedings

Dishonest traders also avoid AD/CVD duties on Chinese imports through two schemes involving the submission of false information to Customs. In the "false classification" scheme, an importer falsely reports that the proper classification for imported goods under the U.S. Harmonized Tariff Schedule (HTS) is one that is not covered by the relevant AD/CVD order. Thus, for a new entry of canned mushrooms from China that would be subject to the AD order on that product, the importer would falsely list on the entry documents the HTS classification for frozen mushrooms. However, Customs' ability to easily detect this type of fraud by inspecting imports upon entry tends to discourage dishonest importers from using the false-classification scheme.

In the "third-country evasion" scheme, an importer falsely reports that the country-of-origin for a new entry is a country other than the true country. This scheme is typically preferred over the false-classification scheme because it is more difficult for Customs to detect. But this scheme is not risk-free, for Customs retains the many documents an importer must submit for each entry for years, which means Customs can investigate an entry's claimed country-of-origin long after the imported goods have been released.

In recent years, dishonest traders have very effectively used the third-country evasion scheme to avoid many AD/CVD orders on imports from China. For example, in 2003 such traders began avoiding the newly issued AD order on honey imports from China by entering tens of millions of pounds of Chinese honey into the United States by reporting a false country-of-origin. In 2008, following years of complaints from the domestic honey industry about this evasion, the U.S. Department of Justice (DOJ) and U.S. Immigration and Customs Enforcement (ICE) announced the first in a series of arrests, indictments and convictions related to a major Chinese honey circumvention scheme run by German food conglomerate Alfred L. Wolff GmbH (Wolff).5

To date, 16 individuals have been indicted in connection with this scheme, including 10 Wolff managers and several Chinese nationals. Those persons, and seven Wolff-owned companies operating in as many countries, have been charged with unlawfully importing $40 million in Chinese honey into the United States over six years by falsely claiming it was produced in nine other countries with the goal of avoiding $80 million in AD duties and the FDA's ban on Chinese honey that has been adulterated with four dangerous antibiotics.6

Despite Customs' strong enforcement efforts against the Wolff group, third-country evasion schemes for Chinese honey - and many other imports from China - persist.

Prospects For Reform

Why is fraud so rampant in enforcement proceedings under AD/CVD orders on imports from China? The bottom line is that the perpetrators of this fraud believe they face little risk of being caught and little risk of being punished if they are caught.

In fact, Commerce and Customs dedicate relatively few resources to fraud detection and typically will not investigate possible fraud unless presented with material evidence by domestic producers. Further, obtaining such evidence is extremely difficult in China, where collecting what is viewed as public information in all other countries is still criminalized as industrial espionage. And China's infrastructure has few of the reliable, independent testing facilities essential to achieving the commercial transparency we take for granted.

Even when the agencies have substantial evidence of fraud in hand, they shy from seeking the full range of penalties prescribed by U.S. law. For example, it is a criminal offense under federal law - punishable by a significant fine and up to five years in jail - for anyone to knowingly make a materially false statement to the U.S. government.7Yet DOJ has never prosecuted anyone under this statute for submitting false information in a Commerce AD/CVD proceeding. Even when confronted with hard evidence of fraud, Commerce too often concludes it lacks the authority to do anything about it. For example, a federal appeals court recently reversed Commerce's decision that it had no authority to re-open a completed administrative review despite having later obtained hard evidence from that a Chinese producer had submitted forged documents in that review.8

Commerce and Customs can best reduce the incidence of fraud in AD/CVD proceedings against imports from China by prosecuting the perpetrators to the fullest extent possible in cases where they have the evidence to do so. The agencies' failure to do this will likely increase fraud in these proceedings because such inaction will reinforce the current view of dishonest traders that there is little risk of being caught or punished for their fraud.

1 See 68 Fed. Reg. 58,064, 58067 (October 8, 2003).

2 See 75 Fed. Reg. 32,362, 32,364 (June 8, 2010).

3 See, e.g., 73 Fed Reg. 35639 (June 24, 2008).

4 See, e.g., 69 Fed. Reg. 54,635, 54,638 (September 9, 2004).

5DOJ Press Release (May 27, 2008), http://www.justice.gov/usao/iln/pr/chicago/2008/ pr0527_02.pdf.

6DOJ Press Release (September 1, 2010), http://www.justice.gov/usao/iln/pr/chicago/2010/ pr0901_01.pdf.

718 U.S.C. § 1001.

8 Home Products International, Inc. v. U.S., 633 F.3d 1369 (Fed.Cir. 2011).

Michael J. Coursey is a Partner at Kelley Drye & Warren LLP, and practices in the firm's International Trade and Customs Law section.

Please email the author at mcoursey@kelleydrye.com with questions about this article.