John Brinkley reports on the illegal transshipment of goods into the US.

Latvia, not known as a honey-producing country, suddenly began shipping honey by the metric tonne into the United States through the port of Houston. Shortly after the United States retaliated against China for dumping steel products in the US, those same products started arriving in huge quantities from Indonesia.

In both cases, the goods had originated in China and were illegally transshipped through the other countries in order to evade US anti-dumping duties. Anti-dumping duties can exceed 200% of an import’s value. That makes the import financially unfeasible. Illegal transshipment “is a large and growing problem that recently has been getting a lot of attention”, says Chris Cloutier, a trade lawyer with Schagrin Associates in Washington, D.C.

In a current case, the US government has accused the chemical distribution company Univar USA of accepting Chinese saccharin illegally transshipped through Taiwan in order to evade a 329% anti-dumping duty. Thirty-six shipments of it entered the US through various ports over a five-year period.

In a suit against Univar, the government is demanding about US$36mn in anti-dumping duties and about US$48mn in civil penalties. “The case should be a warning to importers to verify claims that merchandise from China subject to anti-dumping orders is not being transshipped through another country when imported into the United States,” says Steve Spraitzar, a trade attorney in Larkspur, California. A phone call to a Univar spokesman was not returned.

Transshipping in itself is not illegal; there are legitimate reasons for it. For example, Vietnam might ship raw lumber to Mexico, where it’s milled, cut and made into chairs, which are then exported to the United States. That is a legal and common form of transshipment. It becomes illegal when Vietnam ships finished chairs to Mexico, where someone takes off the “Made in Vietnam” labels and replaces them with “Made in Mexico” labels, then ships them to the US to take advantage of NAFTA. It can happen in Mexico or Indonesia or Malaysia or any place “where they can find somebody willing to commit customs fraud”, says Cloutier, who represents American companies in customs fraud cases.

Illegal transshipping is extremely costly to American businesses. Dumping foreign-made products in the US market makes them dirt cheap and domestic manufacturers can’t compete. Also, American businesses spend millions of dollars every year pursuing anti-dumping cases against foreign firms.

Taking legal action

Because illegal transshipment is hard to prove, there is not a high success rate with these cases. “One of the difficulties is that if the foreign producers are successful in transshipping, say, Chinese pipe through another country to avoid the anti-dumping orders, it does not show up in our import statistics as from China. It lists it as coming from Thailand or Indonesia or someplace else,” says Kevin Dempsey, senior vice-president of the American Iron and Steel Institute. “When there’s evidence of transshipment, it’s often indirect evidence and we’re working with our government to try to get them to properly determine where the goods are from, because otherwise they’ll be incorrectly listed in the customs statistics,” he says.

For about five years after 9/11, the Customs Service didn’t pay much attention to illegal transshipments. It had been moved into the new Department of Homeland Security and tasked with anti-terrorism as its highest priority. That started to change in 2006, when huge quantities of honey began arriving from Latvia at the port of Houston, and officials there smelled a rat. “Somebody at the port of Houston figured it out and got mad and then did some investigating and people went to jail,” Cloutier says. “This is the first time where we see honest-to-goodness enforcement and criminal action against people who are defrauding the United States by mislabelling and importing without the payment of duties.”

In that case, a Houston-based entrepreneur pleaded guilty to facilitating the fraud and was sentenced to three years in prison. The director of sales for Honey Solutions in Baytown, Texas, was sentenced to six months and the company agreed to pay a US$1mn fine.

In terms of enforcement and prosecution, that case was “more the exception than the rule”, because of the difficulty in proving transshipment, Dempsey says. He says that most recipients of illegally transshipped goods “know or should know” that they’re breaking the law. However, he says: “In many cases, there are large trading companies that help facilitate the international sale and shipment of steel products. So, I think at least in some cases, the importers are working with these trading companies,” rather than directly with the foreign sellers. Firms that use these service providers should examine them thoroughly to ensure that they understand and comply with the rules that apply to
the transactions they’re being hired to carry out.

Legislation that President Barack Obama signed into law in June is expected to help the federal government enforce its anti-dumping laws. It established an office in the Customs and Border Protection bureau whose sole purpose is to enforce anti-dumping and countervailing duty laws. It also gave the Commerce Department authority to investigate illegal trans-shipments – authority that only customs has now. Cloutier says: “One of our problems, since I represent US industries, is that commerce tells us to go talk to customs and customs tells us to go talk to commerce. This new bill would fix that problem.”