On April 11th, six Southern California companies were ordered to pay $1.83 billion in restitution for participating in a conspiracy to defraud the U.S. through a scheme in which huge amounts of aluminum — disguised as “pallets” to avoid $1.8 billion in customs duties — were exported to the U.S. and sold to fraudulently inflate a China-based company’s revenues and deceive investors worldwide.
U.S. District Judge R. Gary Klausner sentenced two aluminum businesses and four warehousing companies — all of which were related to one another — to five years of probation, which is the maximum penalty permitted by law, and ordered them to pay $1.83 billion in restitution.
The defendants are:
- Perfectus Aluminium Inc., an Ontario-based business in Canada
- Perfectus Aluminium Acquisitions LLC, a subsidiary of Perfectus Aluminium formed in 2014 to oversee several companies that received aluminum pallets shipped to the U.S. after duties were imposed on Chinese aluminum in 2011
- Scuderia Development LLC, which owns a warehouse in Riverside, California
- 1001 Doubleday LLC, which owns a warehouse in Ontario, Canada
- Von Karman – Main Street LLC, which owns a warehouse in Irvine, California,
- 10681 Production Avenue LLC, which owns a warehouse in Fontana, California
At the conclusion of a nine-day trial in August 2021, a federal jury found all six corporate entities guilty of one count of conspiracy, nine counts of wire fraud, and seven counts of passing false and fraudulent papers through a customhouse. The Perfectus Aluminium defendants also were found guilty of seven counts of international promotional money laundering.
“The Perfectus and Warehouse defendants were integral participants in this conspiracy,” prosecutors wrote in a sentencing memorandum. “Indeed, they existed only to perpetrate it.”
The Aluminum in Question
The corporate defendants sentenced — along with indicted defendants China Zhongwang Holdings Ltd., Asia’s largest manufacturer of aluminum extrusions; Zhongtian Liu, the company’s former president and chairman; and several other individuals —were found to have lied to U.S. Customs and Border Protection to avoid paying the U.S. $1.8 billion in anti-dumping and countervailing duties (AD/CVD) that were imposed in 2011 on certain types of extruded aluminum imported into the U.S. from China.
The aluminum sold to U.S.-based companies controlled by Liu were aluminum extrusions that were spot-welded together to make them appear to be functional pallets. In reality, there were no customers for the 2.2 million pallets imported by the Liu-controlled companies between 2011 and 2014, and no pallets were ever sold. The vast majority of the 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 Liu’s direction.
False Claims
According to reports, Liu and his co-defendants orchestrated the bogus sales of aluminum to Liu-controlled companies in Southern California to falsely inflate China Zhongwang’s value. Liu was the majority owner of China Zhongwang, which has been listed on the Hong Kong Stock Exchange since a 2009 initial public offering that raised $1.26 billion.
After the AD/CVD duties were put in place in 2011, China Zhongwang’s annual reports falsely claimed that there was a robust demand for the aluminum pallets in the U.S. Although the annual reports asserted that the aluminum pallets were being sold to independent third parties — and the defendants used these reported “sales” to inflate China Zhongwang’s reported sales volume and purported volume of exports to the U.S. — in fact the aluminum was being stockpiled by Liu-controlled entities in more than 2 million sq ft of warehouse space owned by the warehouse defendants in Southern California, as well as at Liu’s New Jersey facility.
Since there was no actual demand for the pallets, Liu and China Zhongwang arranged for aluminum melting facilities to be built and acquired, which were to be used to reconfigure the aluminum imported as pallets into a form with commercial value. The defendants facilitated their schemes by laundering hundreds of millions of dollars through shell companies to the U.S.-based aluminum companies controlled by Liu. The funds were then transferred to China Zhongwang and the other shell companies as payments for the aluminum.
On March 24, Judge Klausner ordered the forfeiture of the the seized aluminum to the U.S. This aluminum currently estimated to be worth approximately $70 million.
The remaining four defendants charged in a 2019 federal grand jury indictment in this case have yet to appear in court in the U.S. to face the criminal charges in this matter.
The Investigation
In 2017, the U.S. Attorney’s Office filed civil forfeiture actions against the four Southern California warehouses used by Perfectus to store the pallets. In 2018, the government filed a fifth civil forfeiture complaint against “approximately 279,808 Aluminum Structures in the Shape of Pallets,” about half of which were seized in early 2017 at the ports of Los Angeles and Long Beach, and the other half were seized from three other warehouses Perfectus was using to store the pallets.
Those civil asset forfeiture cases have been stayed — pending the completion of the criminal prosecution.
AEC Continues the Fight to Level the Competition
According to the Aluminum Extruders Council (AEC), the investigation detailed above is one small victory in the fight to offset unfair trade practices of importers of aluminum extrusion profiles produced in China. When tariffs on the aluminum profiles imported to the U.S. were originally imposed, certain companies based in the China attempted to circumvent tariffs by selling the aluminum ‘shell’ companies located in third countries.
On February 8th, the Department of Commerce (DOC) reached its final determination in the 9th Annual Administrative Review on Aluminum Extrusions imported from China. There were 87 Chinese aluminum extruders that were invited to participate in this year’s review. Of those, 85 were not granted a special duty rate, including Kingtom Aluminio SRL, located in the Dominican Republic.
This groundbreaking decision was the first time a Chinese owned and operated aluminum extrusion company located in a third country has been subject to AD and CVD duties. Kingtom’s AD rate will be 86.01% and their CVD rate will be 242.56% for a combined rate of 328.57%. You can find a public version of the AD decision here . The CVD decision can be downloaded here.
“This is an important win for our industry,” said Jeff Henderson, president of the AEC. “As China’s strategy to circumvent our orders expands to include establishing Chinese owned and operated aluminum extrusion plants in third countries, it becomes important for us to send the signal to China that this approach will not work in our industry. This decision by the Department of Commerce does just that.”
The AEC has led the U.S. aluminum extrusion industry in achieving level competition by winning tariff protection that offsets unfair trade practices of extruders/importers of aluminum profiles produced in China. The efforts have been of enormous value to domestic extruders and suppliers and may have saved the industry. Conservatively, AEC estimates 1.2 billion lbs per year of extrusions are being produced in the U.S. that would have otherwise been lost to China.
You can find more information on the AEC’s Fair Trade efforts here.