Will A Customs Dragnet Snag Big U.S. Retailers?

It's called Operation Q-Tip, short for quota transshipment import practices. It's the most massive investigation ever launched by the U.S. Customs Service in an effort to crack down on illegal imports of textiles and apparel from Asia. Some 600 agents have led raids on scores of small companies, seizing 11 million documents and $10 million in bank accounts and other assets.

As Customs' dragnet widens, some major retailers may be caught in the web. In a key move, the U.S. turned up the heat on Taiwan, long suspected of slapping "Made in Taiwan" labels on goods made more cheaply in China. In a conciliatory gesture, the Taiwanese government submitted a report that was a shocker: It turned the spotlight on several brand-name U.S. companies. The report says Kmart, Bugle Boy, U.S. Shoe, Dress Barn, and others allegedly received illicit shipments of clothing from Taiwanese exporters. The companies deny any wrongdoing, and even Taiwanese officials insist that the exporters did not tell the U.S. buyers that the transactions were illegal.

Customs Commissioner Carol B. Hallett acknowledges that her agency is investigating unnamed retailers. In fact, Customs officials in Cleveland and Los Angeles are closing in on a major clothing importer and wholesaler suspected of illegally bringing about $60 million of Chinese goods into the U.S. Agents already have seized several of the importer's shipments, valued at $5.6 million.

Smaller importers are the first to feel Q-Tip's impact. On May 5, a New York grand jury accused three Chinese officials of conspiring with two U.S. companies to evade Customs duties of more than $100,000 by undervaluing goods from China. The U.S. companies are Sunlight International Inc., a New York City sales agent for a Chinese textile manufacturer, and C&H West Merchandising Inc., a California importer. Sunlight declined comment, and C&H President Robert Hsu says his company "did nothing wrong." But John Mallamo, senior special agent in Customs' fraud-investigation division, says "the evidence is very strong." Defendants could face up to five years in prison and $250,000 in fines. Customs has referred 15 other cases to the U.S. Attorney in New York, and 50 more are pending.

FISHY SOURCES. To protect American manufacturers, the U.S. sets quotas on apparel for many countries. Customs agents have been amassing evidence that China's textile industry and U.S. importers have been cheating for years on these quotas by undervaluing or transshipping through third countries about $2 billion worth of goods annually. The cost: more than $300 million yearly in unpaid duties, Customs officials say.

Taiwan is a main target. Faced with rising labor costs, Taiwanese garment makers have been secretly farming out U.S. orders for clothing to factories in China. In February, the U.S. cut Taiwan's quotas an average of 8.3%. Taiwan has since cracked down--and its bombshell report has put major U.S. retailers in the hot seat.

Some companies named say they can't even verify that the shipments took place. "We are checking our records against the report, but we are not aware of any illegal shipments," says Kmart Assistant General Counsel James C. Tuttle. The report also claims that apparel maker Bugle Boy Industries Inc. received illegal shipments from Taiwan and Vietnam. Bugle Boy Chairman William Mow says he canceled an order suspected of coming from Vietnam after learning in November that his Taiwan supplier was farming out business there.

Many apparel experts argue that the quota system should be abolished. They want to see the U.S. set a ceiling on total imports of clothing and let the market decide where they are produced. But for now, Customs remains on the trail of quota cheaters--and U.S. officials think Q-Tip will swab out the violators.

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