3 thoughts on “Huge Fraud Afoot in E.U. Sugar Market

  • Taillefer

    Article by STEPHEN CASTLE and DOREEN CARVAJAL in the International Herald Tribune
    Oct. 26, 2009

    Call it the mystery of the sugar triangle.It began when Belgian customs officials examined shipping records for dozens of giant tanker trucks that outlined an odd, circuitous itinerary across Europe. The trucks, each carrying 22 tons of liquid sugar, were rumbling on a journey that swung through eight nations and covered roughly 4,000 kilometers, or 2,500 miles, from a Belgian sugar refinery to Croatia and back — instead of taking the most direct, 1,500-kilometer route.Along the way the trucks made a brief, out-of-the-way stop in Kaliningrad, a grim and bustling Russian border checkpoint on the Baltic Sea.Suddenly the sugar triangle made sense to customs officials.

    Because Russia, and not Croatia, was listed as the intended destination, the shipments qualified for valuable special payments known as export rebates from the European Union’s farm subsidy program. Some 200 shipments roared along this route over a three-year-period, investigators say, earning €3 million, or $4.5 million, in rebates for the Belgian sugar maker Beneo-Orafti. In the spring, dozens of Belgian and European investigators raided the company’s offices, freezing half of its refunds and initiating an investigation that could cost the company the remaining €1.5 million, and possibly more.In the sprawling European subsidy program — which lavishes more than €50 billion a year in aid — no commodity is more susceptible to fraud, chicanery and rule-bending, experts say, than simple household sugar.

    Across Europe there are about 1 million hectares, or 2.5 million acres, of beet fields that will produce 16.7 million metric tons of sugar this year for a €7 billion industry.Last year the E.U. spent €475 million in price supports — thus keeping the price artificially high. Then it spent a further €1.3 billion on restructuring aid to reform a sugar regime so lavish that it prompted cold-weather Finland to start producing more sugar.Sugar producers across the Continent cashed in, from Italy where Italia Zuccheri collected more than €139 million to France, where a handful of sugar producers received €128.5 million.With this much money at stake, some analysts — who refer to sugar as “white gold” — say the sugar subsidy system is like a cookie jar waiting to be pilfered. The E.U.’s anti-fraud division, called OLAF, reported that from 2005 to 2008, €67 million worth of sugar subsidies were tainted by irregularities and fraud. Many countries have been penalized millions of euros more for lackluster sugar inspections.In 2008, OLAF pursued 34 cases of sugar fraud involving €4.4 million, a figure they describe as the icing on the cake because so many schemes go undetected.Critics have long said that the E.U.’s farm subsidy system distorted the market, skewing competition and driving up prices. That is especially true for sugar, which in Europe has traded at roughly double the world market rate for almost two decades. European sugar prices are the highest per capita of any region in the world and about 20 percent higher than in the United States.But investigators say that fraud and rule-bending also contribute significantly to higher costs, because of the millions lost in uncollected revenue and to pay undeserved subsidies.

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    In addition, there are ongoing investigations into cartel activity to fix prices and divide up customers and territory. This year Germany, Hungary, and Belgium have all pressed cartel-related inquiries of sugar companies and trade associations. “Sugar has been an area of concern for several decades,” said Jörg Wojahn, a spokesman for OLAF. “We have seen problems of fraud with imports, exports and transit of sugar. Substantial amounts of taxpayers’ money and revenue are at stake.

    ”For example, in 2003, Serbian producers were found to be buying cheap cane sugar on the world market for about €210 per metric ton, then repackaging it as domestic produce to sell in Europe at subsidized prices, at that time €630 per ton. The markup produced millions in extra profits for the producers and contributed to higher prices for the consumer.Sugar companies say their activities are misinterpreted because they are governed by a byzantine E.U. system that invites confusion.

    “It’s very complicated” and difficult for anyone to understand, said Dominik Risser, a spokesman for the Südzucker Group, a German company that is the industry giant in Europe and owns 40 factories in 10 nations, including those of Beneo-Orafti. Südzucker, which reaped agricultural subsidies this year of almost €448 million for all its subsidiaries, declined to comment on the investigation of Beneo-Orafti. “We are not going to argue this in public,” Mr. Risser said. “Of course we have our arguments, but we are not going to put it in the press.

    ”Südzucker is one of the companies being investigated for cartel activity; it denies any wrongdoing.The E.U. acknowledges its sugar problem: It has been instituting changes intended to reduce sugar subsidies, and has moved more aggressively to investigate irregularities. In the meantime, dozens of sugar-related raids have been conducted in Greece, Germany, Belgium and elsewhere, including Croatia, where scams were so rampant that the E.U. disqualified the country from the rebate system in 2003.

    Investigators cited Croatia’s role in so-called “carousel” trades, in which European export subsidies were claimed for cheap sugar shipped from countries inside the E.U. to Croatia, and then straight back. Other ploys involve mixing high-priced European beet sugar with low-priced Brazilian cane sugar; throwing in dashes of tea or cocoa in sugar to create a “processed” food that avoids tariffs; and even claiming subsidies for nonexistent “ghost sugar” that is traded only on paper.

    “There’s a whole world of commercial fraud which goes under the radar for most people,” said James Byrne, a law professor at the George Mason University School of Law in Virginia who has studied the global sugar trade. “It is a parallel universe that mimics the real world of commerce and finance.”Origins in a German discoveryThe sugar beet industry began in Germany, where a special museum in Berlin is dedicated to a local scientist who in 1747 discovered that the “runkelübe,” or beet, contained sugar crystals.Now it is Germany where the biggest sugar showdown is taking place. Armed police have raided factories and corporate suites, confiscating computers and truckloads of documents.In March, a series of raids was conducted in Manheim, Cologne and Bonn in connection with suspected cartel activity. Then in late summer, nearly 300 German investigators swarmed over the operations of the nearly century-old August Töpfer sugar trading company in Hamburg. They raided about 35 sites, including sugar factories and the homes of top executives, whose telephones were also tapped. They were so methodical that in one house they left behind only a kindergartner’s Winnie the Pooh laptop.

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    Their suspicions were first aroused more than a year ago when the company submitted paperwork claims for more sugar than could be stored in its silos, according to Dietmar Schulze, a spokesman for the German customs office.As the investigation evolved, it began to center on suspicions that August Töpfer had fraudulently claimed subsidies for sugar that had not come from the European Union. “We are investigating a complex, extensive and difficult case of economic subsidy fraud,” said Wilhelm Möllers, a spokesman for the Hamburg prosecutor’s office.

    August Töpfer’s lawyer, Klaus Landry, insisted the company had not mixed sugars, and said that prosecutors do not understand the arcane sugar subsidy system. “I sometimes say that not more than 10 lawyers in Germany know how it works,” Mr. Landry said, “because it’s very technical and it changes quickly.”He called the raids this summer politically motivated, conducted in a climate of public criticism of high agricultural subsidies. “They keep changing their mind,” Mr. Landry said. “They start with one suspicion and then they change to another one.

    ”No one has been brought to trial in the August Töpfer investigation, but elsewhere sugar producers have been prosecuted for illegal mixing.Schemes are always evolvingPerhaps the most common sugar scheme is to mix in cheap cane sugar with European beet sugar, which lowers production costs and increases the volume, so as to qualify for higher subsidies.

    Many Greek sugar producers — about 30 — have been accused over the last three years of mixing schemes, and some people have been prosecuted and convicted, although typically they appealed and tied up their cases in a slow-moving justice system, according to an adviser to the Greek Agriculture Ministry, who asked not to be named because of departmental policy. “It’s not just Greece that’s involved in this trade,” he said. “This happens in all European countries.

    ”Greece, Italy and Belgium together have been forced to return a total of more than €10 million in misspent agricultural funds from the E.U. because of lax sugar inspection controls. Some of the cane sugar was coming into Greece from Serbia, which temporarily lost its right to sell sugar to the E.U. after the authorities investigated a number of cases in 2003 in which producers were creating shell companies and reselling cheap cane sugar in Europe at huge profits.

    As old schemes are discovered, new ones evolve, extending into a new growth industry of exotic hybrids — sugar mixed with dashes of tea and cocoa.The legality of mixing is a murky area. Diluting beet sugar with cane sugar and incorrectly declaring its origin is illegal, but mixing in small quantities of things like tea is open to interpretation under the rules. The increase in mixing schemes has investigators particularly concerned about Croatia. Officials have noticed that Croatian exports to the E.U. of sugar mixed with a small quantity of tea are steadily rising — from 20,951 tons in 2006 to 52,487 tons last year.

    With the normal duty on white sugar costing €419 a ton, Croatian exporters, by mixing in tea, appear to have avoided some €22 million in customs charges last year. Investigators are also on the lookout for scams that do not actually involve any sugar at all. Known as “ghost” sugar, such trades are made on paper only.Usually, experts say, the practice involves bribing a customs official in a country outside the European Union to issue a declaration that a shipment was delivered, thus triggering an export rebate. “Basically they’re selling pieces of paper that reflect the existence of sugar,” said Mr. Byrne, the George Mason professor. “In my experience, the scams are false from A to Z.”

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