* Criminal groups declare falsely low prices to avoid duties
* Practice costs European taxpayers billions
* Fraudsters deal mainly with Chinese clothing, shoes
* Crime often accompanies VAT evasion, counterfeiting
By Steve Scherer
ROME, July 24 The importer, a front man for the
Calabrian mafia, tells the Chinese seller, who speaks fluent
Italian and lives in Rome, that he wants to fix a lower price on
the next shipment.
Their business is not drugs or weapons, but Chinese
T-shirts, jeans and shoes. The buyer for the mob in Italy's
impoverished south wants to declare a falsely low price to
reduce the customs duties he must pay because, as he says in a
wiretap, "it goes to the state".
This police recording offers a glimpse of the criminal
underbelly of trade between the European Union and China, whose
mind-boggling size - worth well over 1 billion euros a day -
makes it fiendishly hard to police. Making matters worse, the EU
is a single market of 300 million people but which has 28
national customs authorities with differing priorities.
Italy, a high-fashion Mecca and home to a culture obsessed
with elegant appearances, was the top EU importer of low-cost
Chinese clothing a decade ago, before Italian customs agents
cracked down on the illicit practice of undervaluation.
Criminal groups trying to evade tariffs by lying about the
real value of clothing sold in the EU, China's biggest export
destination, had singled out the southern Italian port of Naples
as their entry point. There they were declaring pairs of jeans
for as little as a euro each and T-shirts for 50 cents.
"The profit margins are high, the volumes are huge and the
laws are lax," said Rocco Burdo, the top intelligence officer at
the Italian customs agency's anti-fraud unit.
"Undervaluation is a grave threat to all of Europe, and so
EU integration should be accelerated to make a unified fight
against fraud across the region," he told Reuters at his
office's headquarters on the outskirts of Rome.
After the crackdown led by Burdo, the savvy dealers simply
re-routed goods through other EU ports such as Hamburg. Italy
dropped to number six as importer of Chinese clothing in the
region, but it became the top collector of textiles duties,
customs data show.
National authorities collect customs duties, which vary but
amount to 12 percent of the value of a pair of denim jeans or
cotton T-shirts made in China, but hand three-quarters of the
revenue to the EU's central budget.
Europe has become a bonanza for trade gangs which exploit
the free movement of goods within the EU by importing where
there are fewest controls.
The increasingly sophisticated practice of undervaluation
costs taxpayers billions in lost duties, and it is often
accompanied by counterfeiting and value-added tax (VAT) evasion.
Undervaluation accounts for only a small fraction of overall
customs fraud, and European officials stress that criminal
gangs, not the Chinese government or state-owned companies,
perpetrate this type of fraud.
Nevertheless, it illustrates broader trends in an often
difficult trade relationship, where China's aggressive business
strategy has brought on more than 50 EU trade defence measures
for unfair practices.
Duty-dodging is made easier by the Chinese strategy of
controlling both production and distribution to maximise profit.
Diverging opinions between EU countries on trade disputes, such
as in a recent row over Chinese-made solar panels, also reflect
an inconsistent approach to fighting undervalution.
In Europe, this kind of fraud is conducted mostly by small
companies headed by Chinese nationals living in Europe in
collaboration with local companies which operate below the
radar, the EU's anti-fraud investigative body OLAF said.
"Valuation fraud mainly involves criminal organisations.
It's the bottom end of the market, and outside the normal
commercial circuits," David Murphy, head of the trade customs
fraud unit at OLAF, told Reuters.
"For a fraud investigation agency, it's very difficult to
get to grips with it. When you do engage with it, it either
melts away or moves somewhere else."
OLAF is currently investigating six undervaluation cases,
some already known to involve Chinese nationals, but most cases
are tackled by local authorities.
China is the world's biggest exporter, with EU imports from
there worth 289.7 billion euros ($380.6 billion) last year,
Eurostat data show. Total EU-China trade hit 433.6 billion.
EU imports of Chinese shoes and textiles, which are the
goods targeted by criminal groups practising undervalution
fraud, were worth 36.4 billion euros in 2012.
Though many of the world's most popular brands sell clothing
made in China, the fraudsters who practise undervaluation mainly
supply a more informal retail market.
In Rome's growing Chinatown, there are as many as 10
clothing or shoe shops per city block, selling jeans for 20
euros, T-shirts for 10 and shoes for as little as 15.
But it is in open-air markets across the capital where
Chinese dresses, jeans, shirts, underwear and shoes are sold at
a frantic rate everyday, and it is through these kind of flea
markets, common all over Europe, that the criminal groups make
their biggest profits.
Also common in the open-air markets is the sale of
counterfeit brand-name clothing at heavy discounts compared with
the real thing, like rip-off Converse Chuck Taylor basketball
sneakers for 20 euros.
Investigators say counterfeiting often accompanies valuation
fraud to boost margins further, and in 2011 three quarters of
all fake goods seized at European borders came from China.
"I was surprised at the volumes that you can shift through
these markets," OLAF's Murphy said. "Initially I thought of it
as kind of a minor problem, but in fact vast volumes go through
there and vast profits are generated as well."
There are no official estimates on how much EU taxpayers
lose to overall customs fraud or to valuation fraud, but an
investigation coordinated by OLAF offers some insight.
In conjunction with investigators in several EU states, OLAF
dismantled two major Chinese organised crime groups operating
out of Austria, Italy and Hungary in 2008 and 2009. Total losses
in duties alone were put at 100 million euros, while VAT losses
from national budgets amounted to 200 million euros.
As with counterfeiting, VAT avoidance is a common byproduct
of valuation fraud. After paying falsely low customs duties at
the port of entry, such as Hamburg in Germany, VAT payment is
deferred to a country of final destination within the EU that
maybe has no sea port, such as the Czech Republic or Austria,
and the VAT is never paid, said Murphy.
Five Austrian forwarding agents acted on behalf of Chinese
clients to shuttle clothing through customs, handing it over
afterward to a network of Chinese distributors and retailers in
several European countries.
When the Chinese company running the scam in Vienna was
raided by authorities, they found sophisticated equipment used
to copy and print false invoices, transport documents and
certificates of origin, OLAF said.
"We're talking about billions overall," Murphy said,
referring to customs fraud in general. "In my experience, I
would say it's much higher than it's estimated."
Italy offers an indicative number. The state collected 3.7
billion euros more in customs duties in the decade that followed
its campaign against the fraud compared with what it collected
in 2003, before the squeeze, even though volumes decreased.
After Italy, for many years Germany was the top importer of
Chinese clothing, though it was never more than the
third-biggest collector of duties on garments, data show.
Many of the same companies that were caught practising
valuation fraud in Naples moved to Hamburg, Burdo said, citing
investigations carried out by his office and prosecutors.
Now Britain is emerging as the main importer of Chinese
textiles, though it is no more than the fifth-biggest collector
of duties on the goods.
Some countries have taken time to wake up to the fraud and
use computer systems to spot irregularities in customs
declarations, letting the gangs off the hook. "As each country
became aware of the problem and applied risk parameters in their
automated declaration system, then the operators would move
elsewhere. They are very, very mobile," Murphy said.
Italy's Burdo and OLAF's Murphy say the EU could do more.
"Europe, when taken together, is a significant player in the
world economy and in world trade, but the EU countries do not
play as a team, and this shows in trade with China," Thomas
Rosenthal, an economist who heads the research department at the
Italy-China Foundation in Milan, told Reuters.
Customs fraud, and undervaluation in particular, is made
easier because each country has its own customs agency, and
because some countries are wary of imposing any kind of trade
restrictions while others value them.
For instance Italy, the EU's second-biggest manufacturer
whose goods often compete with Chinese imports, favours curbs
while Germany, the biggest and a major exporter to China,
appears reluctant to confront an important client.
The EU needs to overcome such national interests. "There
should be a further stimulus to political union to become a real
global player," Rosenthal said.
In Italy's street markets, most of the Chinese clothing has
been brought by truck from the ports of Rotterdam or Hamburg,
where it entered the EU, Burdo said. "If there was a single
customs service it might function better," OLAF's Murphy said.