As the debate heats up in Washington over whether to renew China's special trade status, the U. S. Customs Service is on the verge of dealing Beijing a huge economic and political blow. BUSINESS WEEK has learned that Customs is engaged in a sweeping investigation--one of its largest ever--involving two dozen Chinese companies trading with the U. S. According to Customs, the U. S Attorney's Office in New York is preparing as many as 100 indictments of Chinese companies over the next three months on charges of fraud and money laundering.
In a sprawling operation, some 300 customs agents, trade specialists, and others are poring through the import records of Chinese companies at New York's Customs House. Meanwhile, the U. S. Attorney's office in New York has assembled a team of lawyers to work on the case. According to one Customs official, the abuse is straightforward: China has shortchanged the U. S. treasury out of several hundred million dollars over the last three to four years.
FALLOUT. The findings could not come at a worse time for the Chinese. A disgruntled U. S. Congress is stepping up the heat on China for a variety of abuses, ranging from missile sales to Pakistan and Syria to exports of millions of dollars of goods made in prisons (BW--Apr. 22). These new charges of trade fraud are particularly explosive. China's growing trade surplus with the U. S. is likely to hit more than $9 billion this year, second only to Japan. In July, the surplus widened to $1.28 billion, up from $1.02 billion a month earlier.
Bolstered by President Bush's continued backing of the coveted most-favored-nation trade status, Chinese officials have shrugged off allegations of wrongdoing. The fallout could prompt Congress to undermine Bush's policy. If nothing else, the new revelations will make it much harder for China to get special status in 1992, an election year.
Customs officials began the investigation two years ago, after receiving complaints that China was not properly reporting the value of goods exported to the U. S. Then in early September, they took their findings to a New York federal judge and the U. S. Attorney's office. The judge granted Customs' request for search warrants. On Sept. 6, the service raided 23 import and marketing businesses, most of them in New York. Customs officials charge that the trail leads back to China, to such big government export companies as China National Textiles Import & Export Corp. "The Chinese government's involved in this," says one official. "This goes right up to the top." BUSINESS WEEK was unable to reach China National for comment.
NO FILES. Customs' investigation centers on charges that the Chinese are defrauding the U. S. government by underreporting the value of goods shipped to the U. S. Some Chinese companies are also failing to report revenues they routinely receive by selling each other unused export quotas for the U. S. market. Those quota fees should be reported to Customs as company income, which is subject to duties. The products involved include everything from gray cloth to finished fabric and clothing. Beijing claims it does not sell its quotas.
But the documents confiscated by Customs agents tell another story. When officials reviewed the contracts between Chinese companies and their U. S. buyers, they showed entries for quota sales that were never filed with Customs. The Chinese are laundering their unreported profits by putting them into U. S. and offshore bank accounts and real estate, officials say.
Some companies say the U. S. probe is off the mark. The New York law firm Coudert Brothers is representing five of the most prominent Chinese companies. "There is no evidence of wrongdoing," says James B. Sitrick, the chairman of Coudert's executive committee. "Indictments are not convictions." Other Chinese companies claim they were erroneously swept up in the raid. Replies a Customs investigator: "I'm sure they'd all like to think it's a mistake."
Customs has not ruled out raiding other Chinese subsidiaries if the paper trail leads in that direction. While there is no direct link between the companies under investigation and those exporting prison-made goods, Customs is also looking for possible connections. One thing is certain: Customs authorities are gunning for the Chinese textile industry, the country's second-largest export earner. This time, they might hit a bull's-eye.