Alleged 'Funneling' in Recent AD Duty Review Highlights Need for Importer Care, Say Lawyers

During a recently completed review covering fresh garlic from China, Michael Coursey of Kelley Drye, who represents the domestic Fresh Garlic Producers Association, obtained Chinese export data on garlic from the PIERS database, which is produced by the parent company of the Journal of Commerce. When compared to CBP import data, the Chinese data revealed huge discrepancies, said Coursey. A Chinese exporter of garlic with a zero percent AD duty rate, Hebei Golden Bird, had told Commerce it exported 12,500 metric tons (MT) of garlic during the year under review. But the Chinese data showed Golden Bird had exported less than 20 percent of that amount. On the other hand, the Chinese data showed exporters subject to the high $4.71 China-wide rate exported about 32,000 MT of garlic that had gone unreported to U.S. authorities.

According to Coursey, the upshot is that the exporters with high AD rates are falsely claiming that their garlic was instead exported by Golden Bird in order to qualify for Golden Bird’s lower rate. “The actual Chinese exporters illegally paid Golden Bird per-shipping container ‘licensing’ fee to allow the exporters to list Golden Bird as the exporter-of-record for their fresh garlic exports,” he alleged. If the real exporter had been listed for all of the China-wide rate companies, U.S. importers would have been required to post more than $150 million in cash deposits with CBP, he says.

Fraud allegations in hand, Commerce then requested that Golden Bird provide copies of its Chinese export declarations to prove it had actually exported the amounts it claimed. After Golden Bird didn’t provide declarations backing up all of its exports, Commerce in the final results of the review assigned the company the $4.71 China-wide rate as a penalty for its non-cooperation. As a result, any importers that entered garlic between November 2011 and October 2012 that they declared was exported by Golden Bird are set to be assessed duties at the much higher rate. Golden Bird filed suit challenging the decision at the Court of International Trade, and Judge Delissa Ridgway on July 17 issued an injunction stopping liquidation of any such entries until the case is resolved. The lawyer representing Golden Bird did not immediately return a request for comment.

The use of Chinese export data was the key to Coursey’s case, and it’s a tactic he says he’ll use again. “The information from Chinese customs really presents a source of information for corroborating or challenging the volumes specific exporters are claiming to have shipped to the U.S. in connection with annual administrative reviews of AD orders,” he told us. In fact, Coursey is making similar allegations in the 2012-13 administrative review on garlic. He says Golden Bird and another exporter -- Jinxiang Hejia -- claimed over 40,000 MT of garlic exports to U.S. authorities during the period, but Chinese data shows only a little about 6,000 MT of exports from the two companies.

Long History of ‘Funneling’ Fraud; China Data Serves as New Tool

Given the prevalence of the type of fraud alleged against Golden Bird, other lawyers representing domestic producers may start using the tactic as well. “The availability of Chinese export data is a game changer in terms of being able to detect apparent fraud where exporters with low rates ‘rent’ their margins to other shippers,” said Adam Gordon of Picard Kentz. “This type of fraud has been a problem for years,” he said. “I expect you will see Chinese export data used in more and more China cases where these types of games are played.”

China Customs data has been available on PIERS since the 1990s, said Alessandra Barrett of the Journal of Commerce. But several lawyers contacted by International Trade Today say that, while PIERS data has routinely been used in AD/CV duty proceedings, they are not aware of the use of Chinese data to compare export volumes as was done in the garlic case. Barrett says the Journal of Commerce's relationship with the Chinese government is "strong", and she does not anticipate any change to the data's availability in the future.

There may also be room for direct cooperation between the U.S. and China to confront the issue, said Coursey. “There is no upside to either CBP or GACC to tolerate this type of fraud,” he said. “This is something Customs should raise with China, on a reciprocal basis. We’re hoping, and suggesting to CBP, that this be done.” Comparing Chinese export data with U.S. import data “is a tool the two countries could use,” because “both countries have an interest in getting truthful information.” CBP did not return a request for comment.

Commerce has long been aware of the “funneling” issue, as it is sometimes called. In several administrative reviews covering entries of heavy forged hand tools from China from the late 1990s and early 2000s, Commerce assigned a Chinese exporter called Huarong penalty rates for a similar scheme. “Because CBP is prevented from knowing the true seller of the agent sales, the assessment rate calculated by [Commerce] would not have been applied to all appropriate entries,” it said as it explained its reason for imposing the penalty rate in the 2002-03 review. “Thus, the existence of such a scheme during the [period of review] undermined our ability to impose accurate antidumping duties,” it said.

“The idea that companies with high cash deposit rates might try to find someone with a low cash deposit rate to export or funnel their merchandise into the United States through use of that low cash deposit rate” is not “a new phenomenon,” said J. Michael Taylor of King & Spalding. “I think importers should be careful to ensure that they are actually dealing with a true exporter, and not a company that’s acting like a funnel.”

Importers Should Know Their Exporter, Be Wary of Red Flags

Much of the time, the importer of funneled merchandise is in on the scheme. “The importers involved are ‘shell’ companies that have been set up specifically to import goods covered by AD/CVD orders, and to utilize a low cash deposit rate at the time of entry until they are caught and/or the rate goes up, at which point they dissolve,” said Gordon. “These shell companies are set up to reduce or eliminate any chance that Customs can collect duties that Customs can collect duties that are owed. They are typically collection-proof,” he said. “Once one is caught and shut down, another is ‘activated’ and begins operation,” said Gordon.

But it’s not out of the question that a legitimate importer can get caught up in a funneling scheme. “It is something that can catch an importer unaware, and it has happened,” said Su Kohn Ross of Mitchell Silberberg. “What you end up having is, the American importer imports at one rate thinking that it’s the correct rate, and then they get hit with staggering bills after the fact,” she said.

As with many potential violations, importers need to know who they’re doing business with in order to protect themselves. "If they’re playing those kinds of games, you should be able to tell that from looking at the shipping documentation,” said Kohn Ross. “If your deal is with company A, and all the sudden companies B and C are showing up on the invoice or on the bill of lading, that should tell you that there’s something funny going on. That should put you on notice,” she said. Even an explanation from the exporter that they’re in a close relationship with the “company B” should be a red flag,” said Kohn Ross.

Products shipped from China are often produced by a different company than the exporter, but Commerce has in the past identified circumstances that show a company is funneling rather than acting as a legitimate trading company. In another administrative review on hand tools from China covering entries in 1999-2000, Commerce imposed a penalty rate on a Chinese producer for funneling their merchandise through another company with a lower rate. As proof that the trading company selling the producer's merchandise wasn’t actually the exporter, Commerce cited the fact that the producer didn’t actually sell the merchandise to the trading company before it was exported. Instead, it hired and paid it as an agent to process invoices and export documentation. And the U.S. importer interacted directly with the Chinese producer instead of the exporter, making direct payment to the producer too.

Meeting the usual standard of reasonable care may not be enough to protect importers from liability, said Lawrence Friedman of Barnes Richardson. “Because the importer is liable for duties even in the absence of a violation, there may be no way to establish business certainty,” he said. “In the case of dumping and countervailing duties, where the rates on something like an aluminum extrusion from China might be over 300%, an unanticipated bill for AD and CV duties can be devastating even in the absence of potential liability for penalties,” said Friedman. “So, the normal trade mantra of making sure to exercise reasonable care might only be sufficient to avoid a penalty, while insufficient to protect the company from what might otherwise be an unacceptable business risk.”