By Daniel Michaels
BRUSSELS -- U.S. corporate giants are being hit so hard by a
European smuggling wave that even the White House has weighed
The problem was evident on Romania's border in March, when
authorities acting on a tip stopped a truck from Turkey carrying
nine tons of dangerous contraband. Months earlier, Spanish police
and customs officials raided a secret warehouse near the city of
Granada, impounded 19 tons of illicit substances and arrested three
people. In August, authorities in the Italian port of Livorno
captured an illegal 3.7-ton shipment from China.
What the officials sought wasn't drugs or weapons, but
The climate-harming chemicals, hydrofluorocarbons, are severely
restricted by the European Union, which wants to replace them with
newer, more-ecological compounds as part of its effort to cut
greenhouse gas emissions. U.S. companies have invested heavily in
cleaner formulas to win a greater share of Europe's new market.
However, the old versions, known as HFCs, are still legally used
across much of the globe, in cooling systems from car
air-conditioners to store freezers, which means large volumes of
trade word-wide. The price difference between sophisticated new
EU-approved refrigerants and cheaper, abundant and generally
interchangeable older formulas has sparked a black market and drawn
smugglers, many from international crime syndicates. Illicit
offerings can sell for around 25% less than regulated gas,
"The profit from this sort of activity is exactly the sort of
thing that appeals to modern organized crime gangs," and the risks
are much lower than from many other criminal activities, said
Benedict Hamilton, a managing director at Kroll, a private
investigation company hired by multinationals hurt by the
smuggling, including U.S. industrial giants Honeywell International
Inc. and Chemours Co.
For Honeywell and Chemours, which have invested more than $1
billion to develop new-generation chemicals, Europe's
law-enforcement problem has become a business nightmare. Their
once-promising market has been so diminished by black-market sales
that they have complained to national governments, and U.S. Trade
Rep. Katherine Tai recently cited the issue in her office's annual
report on foreign trade barriers.
The companies said in a statement that they fear a tightening of
EU quotas for HFCs this year is "creating new opportunities for
smugglers to fill the gap."
Refrigerants are just a tiny corner of a booming illicit global
trade that runs parallel to legitimate business. Easy money from
illegal and environmentally damaging activities -- from unregulated
waste dumping to pesticide smuggling -- is a growing threat to
ambitious plans to reverse climate change, say people who study the
The issue has gained more attention since the U.S. Environmental
Protection Agency proposed rules in May to cut the use of HFCs, as
the EU enacted in 2014 and as countries including Japan and South
Korea later did. Investigators say U.S. geography makes it less
vulnerable than Europe, but its troubles still offer a warning.
"Illegal imports are dragging the legitimate market down and
putting a brake on the transition to more sustainable solutions,"
said Murli Sukhwani, general manager of fluorochemicals at Chemours
and head of an industry group investigating the issue. He added
that the EU wouldn't be able to meet its climate goals if the
degree of smuggling continues.
HFC smuggling is one of many obstacles to halting climate
change. While advanced technologies like offshore wind farms and
green hydrogen draw lots of attention, the continued use of coal
and charcoal for fuel, the illegal burning of waste and unregulated
use of climate-harming chemicals threaten to undo progress made by
Deepening the problem, criminal organizations have spotted the
chance to profit from undercutting EU environmental regulations.
HFC smuggling by some estimates costs European governments hundreds
of millions of dollars annually in lost tax revenue.
Fraudulent trade in legal products -- dodging taxes, customs
duties and other levies -- is Europe's most lucrative criminal
activity, according to a recent study by Rand Corp., generating an
estimated 77 billion euros in 2019, the equivalent of about $93
billion, compared with about EUR30 billion for illicit drugs, the
think tank said.
Europe's HFC smuggling problems began in 2018, when the first
big reductions of the chemicals' use kicked in under the 2014 law,
known as the F-gas regulation in reference to fluorinated
greenhouse gases. Demand for the new formulations rose through
spring but then sank. Market prices of HFCs simultaneously fell,
suggesting a glut.
Honeywell, Chemours and other legal producers, initially unable
to draw officials' attention, hired Kroll. Working in part from
tips provided to a hotline for local businesses to report
suspicious activities, Kroll detectives learned that gas canisters,
mainly produced in China and sold legally in EU neighbors including
Turkey and Ukraine, were being smuggled into the bloc.
Once in the EU, the gas was hawked furtively for cash to small
businesses including car mechanics and air-conditioning maintenance
companies at prices well below market rates.
"We were really flooded," said Alessandro Borri, sales and
marketing director at General Gas, an Italian refrigeration
company. He estimates that over the two years to mid-2020, 20% of
Italy's market was lost to illegal HFC sales, costing his company
more than $2 million in profit annually.
Industry experts estimate that in 2018 and 2019, illegal HFCs in
the EU likely accounted for about one-fourth of the market and
pumped into the atmosphere a volume of carbon dioxide equivalent to
55 million extra cars.
Since the smuggling cheats countries out of revenue from duties
and value-added taxes, Kroll got the attention of customs
authorities, fiscal police and the bloc's antifraud agency, known
as OLAF, passing along tips from the hotline. The investigation
company also helped train customs officers, leading seminars across
12 countries and training more than 600 officials to spot illegal
shipments and suspect paperwork.
Soon, border control agents aided by OLAF were impounding
thousands of illegal single-use canisters filled with smuggled
HFCs. The EU requires that gases be transported in reusable
containers. Authorities in 2020 reported seizing roughly 150 tons
of the chemicals, the equivalent of 320,000 tons of carbon dioxide,
much of it due to tips from the companies and Kroll.
However, success was short-lived. By early 2020, traffickers had
shifted from smuggling truckloads of canisters to more openly
importing larger quantities of HFCs and then defrauding customs
"The data suggests we just squeezed the balloon and pushed the
problem somewhere else," said George Koutsaftes, president of
Honeywell Advanced Materials.
The scams take advantage of regulatory gaps in EU laws and
national customs oversight. While the F-gas regulation is EU-wide,
each of the bloc's 27 countries still patrols its borders and
collects customs duties. Smugglers began importing HFCs from China
and claiming they were for re-export outside the EU, to countries
such as Ukraine, and so exempt from regulatory import limits.
After clearing port customs, the shipments disappear into the
EU's black market. The smugglers forfeit some customs payments they
would recoup on re-export, but make far more money undercutting
"Our customers are asking us what's next," and want more
environmental improvements, said Honeywell's Mr. Koutsaftes. "But
we can't do that unless the current rules are enforced."
Write to Daniel Michaels at email@example.com
(END) Dow Jones Newswires
June 04, 2021 07:16 ET (11:16 GMT)
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