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Tuesday, September 02, 2014         

NEW YORK TIMES


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As a coolant is phased out, smugglers reap big profits

By Elisabeth Rosenthan and Andrew W. Lehren

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MIAMI >> The chief executive of the century-old company from America's heartland shifted nervously on the witness stand here as he tried to explain how a trusted senior vice president had been caught on a wiretap buying half a million dollars in smuggled merchandise, much of it from China.

But the contraband purchased by Marcone, a St. Louis-based company that claims to be the nation's largest authorized source for appliance parts, was not counterfeit handbags or fake medicines. It was a colorless gas that provides the chill for air conditioners and refrigerators from Miami to Mumbai, India, from Bogota, Colombia, to Beijing.

Under an international treaty, the gas, HCFC-22, has been phased out of new equipment in the industrialized world because it damages the earth's ozone layer and contributes to global warming. There are strict limits on how much can be imported or sold in the United States by U.S. manufacturers.

But the gas is still produced in enormous volumes and sold cheaply in China, India and Mexico, making it a profitable if unlikely commodity for international smugglers.

So in 2009, Carlos Garcia, the Marcone vice president, generated big business for his company's growing air-conditioning operation by selling smuggled foreign gas to repairmen at rock bottom prices in a promotion called Freaky Freon Fridays, drawing on a brand name that many use as a synonym for coolants.

Although it has been illegal to sell new air conditioners containing HCFC-22 in the U.S. since 2010, vast quantities of the gas are still needed to service old machines. Importing HCFC-22 without the needed approvals, as Marcone did, violates international treaties and U.S. law and regulations.

Yet for a long time, "Mr. Garcia was a hero to his company" for the profits his Freaky Freon Friday campaign generated, an assistant U.S. attorney, Thomas A. Watts-FitzGerald, told a rapt federal courtroom here in April.

On June 26, Garcia was sentenced to 13 months in federal prison.

International efforts to curb the use of HCFC-22 are faltering for dozens of reasons, from loopholes in environmental treaties to the reluctance of manufacturers to step up development of more environmentally friendly machines.

But the underlying problem is that even as international treaties and U.S. law demand that companies renounce the use of the coolant, economics propels them to use ever more — sometimes even if it means breaking the law.

Although the Marcone case is the largest smuggling prosecution anywhere so far, investigators believe that smuggled gas is used by other companies in the U.S., and European customs officials have intercepted shipments of contraband gas arriving in Finland, Slovenia and Poland in the last two years, said Halvart Koeppen, a U.N. official who tracks illegal trade of the gas. This is "the tip of the iceberg," he said.

Much of the global air conditioning industry relies on the gas the way the auto industry does on gasoline. But while oil is getting scarcer and more expensive, HCFC-22 is becoming more abundant and remaining cheap on the global market.

"There is no question that this is inhibiting phaseout," said Rajendra Shende, a former head of the U.N. Ozone Secretariat who runs the Terre Policy Center, an environmental research institute in Pune, India.

In the meantime, the price of legitimately obtained gas has been rising in the U.S. and throughout Europe. That is because governments of industrialized nations, to comply with the ozone treaty known as the Montreal Protocol, restrict the use of the environmentally damaging gas in various ways.

In the U.S., the Environmental Protection Agency requires that companies obtain a license to make, sell or buy specific amounts of HCFC-22, with such "allowances" decreasing year by year.

The dwindling supply has led to pronounced spikes in price. What once cost retailers like Marcone $55 a canister was by 2009 going for $140 in the U.S.

By reducing the supply of the coolant and encouraging prices to rise, the U.S. government hoped to force manufacturers and consumers to scrap old machines and invest in more environmentally friendly, if more expensive, alternatives. But it has not worked out that way, especially in recessionary times when people hang on to old appliances and search for cheap shortcuts.

Many air conditioning manufacturers have even figured out how to sidestep the 2010 ban on selling new machines containing HCFC-22, by offering unfilled air conditioning compressors that service workers swap into existing units and then fill with the gas, creating refurbished machines that are as good as new.

The chemical giant DuPont estimates that the service demand for HCFC-22 will exceed the supply by 27.5 million pounds annually in the U.S. for the next three years.

A big chunk of that shortfall will be made up through smuggling, experts say. And smuggled gas is cheaper, going for $130 a canister in the Marcone case.

The smuggling is difficult to stop because gas canisters can be readily mislabeled to mask their content. Inspections are time-consuming, policing requires expensive testing equipment that is in short supply, and border agents have more pressing targets like guns and narcotics.

In the 1990s, when the world began a successful campaign to eliminate the use of an even more powerful ozone-depleting substance called CFC-12, smuggling was also a problem. But 20 years later, the challenges are far greater: The center of the cooling industry has moved to Asia, where gas production is more difficult to monitor. China now makes more than 70 percent of the world's room air conditioners and more than half of the world's supply of HCFC-22.

It is also easier for smugglers to hide contraband in the dizzying flows of legitimate goods in an increasingly globalized world.

"This is a crime that has all the profits of drug trafficking and none of the risk," said Watts-FitzGerald, the prosecutor in the Miami case.

In many ways, it was Garcia's bad luck that the only U.S. attorney's district office to have a special environmental crimes unit is in South Florida. Its relentless two-year investigation, complete with wiretaps and informants, raised the curtain on a multimillion-dollar web of smugglers and trafficking routes stretching from factories in the developing world — mostly China — to the Dominican Republic, Wales, Mexico and other points before the coolant gas ended up in U.S. homes.

The smuggled Marcone coolant entered the U.S. through a variety of ruses, evidence presented by prosecutors showed.

Some of the Chinese gas on offer traveled to Ireland and the Dominican Republic before arriving in Miami, hidden among legitimate goods in three cargo containers on a small freighter. Garcia helped falsify shipping documents, express-mailing faked invoices to middlemen in the Dominican Republic to ease passage into the U.S.

Other canisters came in an illegal shipment from Harp International, a leading manufacturer of the gas in Wales, accompanied by false documentation that the gas had been recycled to comply with import restrictions.One lot of smuggled gas traveled a particularly dizzying journey: made in the U.S. and exported to Mexico, only to be sent back to Miami.

DuPont exports gas to Mexico — the top foreign destination for U.S.-made HCFC-22 — because it makes more of the coolant at its Louisville, Ky., factory than it is allowed to sell in the United States. But because Mexico does not yet restrict use of the gas, the market price in Mexico is far lower than in the U.S.

The smugglers took advantage of the differential, buying cheaper DuPont gas in Mexico and routing it back through the Caribbean to Miami for sale at north-of-the-border prices. The shipment was stopped after federal agents noticed that the canisters' markings indicated that they had been packaged for the Mexican market.

As a result of the Miami investigation, Marcone pleaded guilty to violating federal laws. So did several smugglers, including a Florida couple and a now-jailed Irish national financed by a Peruvian businessman who was recently indicted as well.

Caught on a wiretap, Garcia once asked a supplier whether the product was from Honeywell or DuPont.

"From China," the man answered.

Over time, he apparently became comfortable with his booming business, bragging about how easy it was to smuggle coolants into the U.S.

"Remember that there are a bunch of tricks," he said.






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