THE US Department of Justice, prompted by the investigations of a disgruntled California businessman, has indicted Chinese billionaire Liu Zhongtian, founder of aluminium giant China Zhongwang Holdings Inc, for defrauding the US of $1.8bn in unpaid tariffs on cargoes of misdeclared aluminium shipped through the ports of Los Angeles and Long Beach.

The unsealing of the indictment against Mr Liu came as President Donald Trump on Thursday threatened to extend tariffs to essentially all Chinese imports, effective from September 1. The threatened extension would come on top of tariffs already imposed on about $250bn worth of imports from China as Mr Trump pursues his key policy of making China trade on a level playing field.

The indictment, reached in May but left sealed until July 31 — possibly for political purposes — accuses Mr Liu of conspiring to defraud the US through a far-flung scheme that involved the company’s headquarters in Liaoning, China, the two San Pedro Bay ports and a remote desert location in Mexico. The indictment alleges that the scheme began in 2008 and continues to this day.

“This indictment outlines the unscrupulous and anti-competitive practices of a corrupt businessman who defrauded the United States out of $1.8bn in tariffs due on Chinese imports,” said US attorney Nick Hanna. “The rampant criminality described in this case also posed a threat to American industry, livelihoods and investments.”

Suspiciously cheap

That threat was felt early on by Mike Rapport, a California businessman, as his sales of aluminium began to decline several years ago in the face of intense competition from Chinese products that were not only cheaper but also more readily available than his.

“How could theirs be so cheap? That’s what I wanted to know,” he told Lloyd’s List.

Mr Rapport said he undertook 11 journeys to China to learn how the country’s factories could produce and sell aluminium so cheaply, even including the costs of shipping the products across the Pacific Ocean.

Mr Rapport said he began to learn how Chinese manufacturers were able to misdeclare their cargoes, allowing them to bypass the imposition of tariffs and enabling them to be sold at prices far lower than his goods.

But Mr Liu’s scheme really started to unravel in 2014 when Mr Rapport, on a family visit to Mexico, began hearing rumours of a large aluminium factory near the town of San José Iturbide, at the foot of the Sierra Gorda mountains in the Mexican state of Guanajuato.

His efforts to visit the factory as a potential customer were rebuffed by management, piquing his curiosity. Mr Rapport commissioned a pilot to fly him over San José Iturbide so he could snap aerial photos of the remote desert factory.

“I got the shock of my life,” Mr Rapport said. What he discovered — and photographed — was nearly 1m tonnes of aluminium neatly stacked behind a fortress of barbed-wire fences.

His reports of the stockpile, worth an estimated $2bn and representing roughly 6% of the world’s total inventory of aluminium at the time, eventually resulted in complaints by the US metals industry, including allegations of transhipping.

Those complaints prompted an investigation by the US Commerce Department, which in May concluded, among other things, that Vietnam had been used as a transhipment centre to mask the Chinese origins of Mr Liu’s products.

“The Department of Commerce preliminarily determines that extruded aluminum products that are made from aluminum previously extruded in the People's Republic of China and are exported from the Socialist Republic of Vietnam, regardless of producer, exporter, or importer, constitute merchandise completed or assembled in other foreign countries and are circumventing the antidumping duty and countervailing duty orders on aluminum extrusions from China,” the Commerce report states.

Meanwhile, the 53-page indictment unsealed on July 31 alleges that China Zhongwang Holdings Limited and Mr Liu, along with several other individual and corporate co-defendants, lied to US Customs and Border Protection to avoid paying the $1.8bn in anti-dumping and countervailing duties imposed in 2011 on certain types of extruded aluminium imported into the US from China.

The aluminium products sold to US-based companies controlled by Mr Liu were simply aluminium extrusions that were spot-welded together to make them appear to be functional pallets, which would be misdeclared as finished goods and not subject to the duties, according to the indictment.

The misdeclared aluminium pallets were imported through the Ports of Los Angeles and Long Beach and then stockpiled at four large warehouses in Southern California, all of which were purchased at Mr Liu’s direction.

Mr Liu and his co-defendants orchestrated the bogus sales of aluminium pallets to Liu-controlled companies in Southern California to falsely inflate the value of China Zhongwang, according to the indictment. 

In reality, prosecutors said, there were no customers for the 2.2m pallets imported by the Liu-controlled companies between 2011 and 2014, and no pallets were ever sold. 

Inflated share price

Instead, paperwork passing between the various Liu-controlled companies gave the impression that China Zhongwang Holdings Inc enjoyed large sales and thus boosted the firm’s share price — to the benefit of Mr Liu and other large shareholders.

Mr Liu is a major shareholder of China Zhongwang, which has been listed on the Stock Exchange of Hong Kong since a 2009 initial public offering that raised $1.26bn.

An arrest warrant has now been drawn up for the 55-year-old Mr Liu, known as “Uncle Liu” and “Big Boss”, according to the indictment. Now thought to be in China, Mr Liu faces charges of fraud and international money-laundering that carry a maximum prison term of 465 years if he is convicted, according to prosecutors.

What began as a private investigation by Mr Rapport into the pricing of Chinese aluminium on the US market eventually turned into a criminal investigation of much greater proportions by US federal authorities.  

Prosecutors believe the indictment against Mr Liu is one of the largest tariff-related cases ever brought by the Justice Department, a matter of some surprise to Mr Rapport who never expected that his early investigations would even reach the level of a criminal inquiry. 

Still, he expressed satisfaction with the results, telling Lloyd’s List: “I’m proud that I helped save the industry.”