The Big Flap Over The Customs Audit

When auditors from the U. S. Customs Service first began sifting through the crankshafts, cotter pins, and quarter panels that go into the Honda Civic hatchback in Alliston, Ont., they were "astonished," recalls one official familiar with the investigation. Major chunks of the car, mostly fashioned from Japanese parts, underwent seemingly miraculous transformations as they moved from supplier to supplier, eventually appearing on Honda's books as 100% American-made.

The deeper investigators dug, the more they came to believe that Honda's "Made in America" image was a facade. Customs dubbed its inquiry "Operation Tin Lizzie" and prepared to go after the $20 million in tariffs it said Honda owed on 1989- and 1990-model cars shipped from Canada to the U. S. To qualify for duty-free import under the U. S.-Canada free-trade agreement, at least half the value added in a car must originate in North America. Auditors decided the actual North American content of the cars made in Alliston was less than 40%.

Excited Customs officials thought they had broken a major case and expected swift action from their boss, Commissioner Carol B. Hallett. Instead, they precipitated a bitter high-stakes bureaucratic struggle that sidelined the Honda probe, embarrassed the Administration, and pitted Customs against its parent agency, the Treasury Dept. Now, some congressional Democrats are crying coverup.

AUDIT EXPOSURE. Caught in the center is Hallett, a onetime California state legislator and ambassador to the Bahamas. As the largest and most complex audit Customs had ever undertaken neared completion last March, Hallett's staff briefed her on the contents of a 50-page white paper setting out Honda's alleged transgressions. On Mar. 21, Hallett forwarded the confidential memo, along with a signed two-page cover letter, to her boss, Deputy Treasury Secretary John D. Robson. "We intend to initiate action immediately" to stop Honda from importing cars duty-free from Canada, Hallett declared. "We will also begin action to collect $20 million in duties." Details of the still-confidential memo and report have been reviewed by BUSINESS WEEK.

But eight months passed, and nothing happened. Instead, Hallett has disavowed her own memo, telling Congress she hadn't read the staff-prepared document carefully before signing it. And in a move that infuriated congressional Democrats from car-producing states, Hallett apologized to Honda after some details of the audit were published in The New York Times and after Honda lobbyists -- including a former Treasury Dept.general counsel -- appealed directly to Robson.

It was after the June 17 newspaper story that Peter J. Wallison, former Treasury general counsel and now a Washington partner in Gibson, Dunn & Crutcher, Honda's law firm, called Robson. Wallison asked for a meeting, and two days later Robson ushered the entourage from Honda into the Ulysses S. Grant Room on the second floor of the Treasury building for a 45-minute meeting. Those present included Wallison, law partner and Honda attorney Donald Harrison, and the presidents of Honda's U. S. and Canadian subsidiaries. No Customs Service representatives were present.

Three days later, a chastened Hallett wrote to Hiroyuki Yoshino, president of Honda of America Manufacturing Inc., to assure him that the audit was not complete and that Honda's "views on particular issues of interpretation" would be welcome. Hallett declined requests for an interview.

'ODD CONCLUSIONS.' Honda is outraged over the leak of confidential price data. And it sharply challenges the audit's conclusions. "We feel we meet or exceed the 50% North American content requirement," fumes Ross Robinson, senior vice-president of Honda Canada Inc.

Treasury officials, defending their inaction, insist that Customs "bean counters" exceeded their authority and unfairly counted as Japanese the U. S.-based parts suppliers entirely or partially owned by Honda. "They came to some odd conclusions," says Deputy Assistant Treasury Secretary John P. Simpson.

Treasury also denies that Honda lobbyists exerted undue influence in the matter. "We are going to do a thorough audit and look at all the issues and let chips fall where they may," promises Robson. "There is nothing mysterious or conspiratorial involved here."

Congressional Democrats aren't so sure. To them, Treasury's action recalls the overturning of a 1989 Customs ruling. Customs had rejected Japanese attempts to classify some light trucks as cars to avoid the 25% truck duty. Under the pressure of heavy lobbying, Treasury reclassified four-door Toyota 4Runners, Isuzu Troopers, and similar vehicles as cars, even though they are still considered trucks for safety and emission purposes. "It looks to me as if somebody muscled that decision around with lobbying influence, and it looks to me exactly as if that has happened here in this case," charges Senator Donald W. Riegle Jr. (D-Mich.). Adds Representative Sander M. Levin (D-Mich.): "We don't want the issue interpreted, bargained, or intimidated away."

Despite Hallett's assurances to Congress that the audit would be complete by mid-October, the investigation is still in progress -- now under the watchful eye of Treasury officials.

Before it's here, it's on the Bloomberg Terminal.