The Keenest Sorrow: Failing Verification
Sophocles wrote, " The keenest sorrow is to recognize ourselves as the sole cause of all our adversities,” which probably applies to the Watanabe Group Companies of China in a recent antidumping determination by the U.S. Department of Commerce (“DOC”).
DOC published in an October 18, 2010 Federal Register notice its preliminary results in Certain Lined Paper Products (“CLPP”) from the People’s Republic of China, for the third administrative review of that antidumping order. DOC imposed a 258.21% dumping rate on Watanabe, based on “adverse facts available,” because DOC believed that Watanabe submitted false documentation at verification.
DOC explained the reasons for the results as follows:
“…petitioner supplied invoices which they claimed correspond to invoices related to third-country sales reviewed at verification and provided as verification exhibits. Specifically, petitioner points to the similarity between the products listed, quantities and other details in the two sets of invoices. However, they note the significant differences in payment amounts between the two sets of invoices. Additionally, petitioner provided documentation demonstrating payment in the amount listed on the petitioner-provided invoice and receipt of that amount as recorded in Watanabe supplied payment documentation at Verification Exhibit 14 at page 1. For three of Watanabe's third-country sales, petitioner provided documentation demonstrating payment in the amount listed on the invoices petitioner provided and not those provided by Watanabe. This raises a fundamental question about the reliability of the documents reviewed at verification.”
“Regardless of the motives of either party, we preliminarily determine that petitioner has provided credible evidence of misreporting of sales values by Watanabe. The fact that the total revenue associated with the invoiced amounts petitioner submitted tied to the company book and records tends to show that the prices on the invoices reviewed at verification are incorrect, thus fundamentally calling into question the reliability of Watanabe's records.”
“To ensure that the margin is sufficiently adverse so as to induce cooperation, we have preliminarily assigned to the PRC-wide entity, including Watanabe, the rate of 258.21 percent, the highest rate on the record of this proceeding. This rate was assigned to the PRC-wide entity in the investigation of CLPP from the PRC.”
Background
An antidumping case was filed against Certain Lined Paper Products (“CLPP”) from the People’s Republic of China on September 9, 2006. Lined paper is used as school supplies, such as notebooks, composition books, loose leaf, filler paper, graph paper, and laboratory notebooks, for writing reports and doing homework. The Watanabe Group participated in the original investigation and received a margin of 134%.
In the First Administrative Review, DOC obtained Customs and Border Protection (“CBP”) quantity and value data for the parties for which a review was requested. After assessing its resources, DOC determined that it could reasonably examine only one of the four exporters subject to the review.
On November 7, 2007, DOC selected Lian Li as a mandatory respondent, not the Watanabe Group. Lian Li succeeded in explaining its accounting system and reconciling most of its costs to its financial statement. As a result, Lian Li received an antidumping margin of 22.35%, which was shared by the Watanabe Group, dropping its margin from the 134% of the original investigation
In the Second Administrative Review, DOC determined that facts available with an adverse inference were warranted for Watanabe because Watanabe had submitted an incomplete response to DOC’s initial questionnaire. Watanabe had claimed that, because it did not sell subject merchandise to the United States during the period of review (“POR”), it would not respond to Sections A, C and D of the questionnaire. However, entries of its merchandise in fact had been made during the POR. Because Watanabe refused to supply the requested information and the record contradicted its representations, DOC assigned Watanabe a punitive facts available rate of 258.21 percent in its final results of the Second Administrative Review. Nonetheless, Watanabe still had a chance to turn its situation around, as it had sales during the period to be examined in the Third Administrative Review.
Verifying The Preliminary Results Of The Third Administrative Review
DOC conducted the Third Administrative Review for the period September 1, 2008, through August 31, 2009 with respect to four producers/exporters. This time, Watanabe was examined and everything seemed to be going well, until the petitioners submitted third country invoices (invoices the petitioner obtained from other buyers of the product), which caused DOC to doubt the accuracy of Watanabe’s records. As DOC reported in its Federal Register Notice of the preliminary results:
- Petitioner-submitted invoices appear to establish that the sales and payment values do not tie to Watanabe's own internal records.
-Watanabe argued the petitioner refers to third country sales, which it claims are irrelevant to the Department's inquiry into U.S. sales and the mere allegation that such third country sales were diverted to the United States is insufficient.
-Specifically, petitioner points to the similarity between the products listed, quantities and other details in the two sets of invoices. However, they note the significant differences in payment amounts between the two sets of invoices.
-For three of Watanabe's third-country sales, petitioner provided documentation demonstrating payment in the amount listed on the invoices that were not those provided by Watanabe. This raises a fundamental question about the reliability of the documents reviewed at verification.
-The fact that the total revenue associated with the invoiced amounts petitioner submitted tied to the company books and records tends to show that the prices on the invoices reviewed at verification are incorrect, thus fundamentally calling into question the reliability of Watanabe's records.
Hence, after the petitioners saw the verification exhibits and compared them to documents they had collected from third parties, they called conspicuous differences to DOC’s attention. They pointed out that verification documents that tied to the third party invoices agreed in total, but the quantities and prices did not. The Petitioners also pointed out that the payment amounts shown on the third country invoices did not match the amounts shown as being paid on those invoices in the accounting records that the respondent presented to DOC at verification.
For a company to improve its margin, it would need to prove higher U.S. sales prices for subject merchandise. In a period of review, the company would have to be selling, therefore, at higher prices than during a prior period. Companies trying to manipulate their records, without in fact making such sales, should expect to be caught and to face the consequences.
It seems that some companies have tried to manipulate their records by appearing to have prices for third country sales that are lower than U.S. sales prices by an equivalent amount (i.e., lowering the reported price on the third country sales by the same amount that they increase the price on the US sale, such that the total remains the same). The total then appears reconciled in the summary totals of the financial statements. Financial statements and invoices appear to reconcile; the antidumping margin falls. The exercise, however, is fraudulent, and the lawyers’ certifications are false. When petitioners present contrary third country prices, the perpetrating companies are caught.
For a successful verification, where DOC officials do not think they are being deceived, financial records must be reconcilable internally and with the answers respondent companies have provided in questionnaires. CLPP is not the first case in which a Chinese company failed in a cloud of distrust generated by inconsistencies exposed in their own documents, but with a growing DOC concern about Chinese respondents generally, it is surprising that Watanabe was apparently not at least more alert about its own records.
The most celebrated and very public example of verification failure involved Crawfish from the People’s Republic of China. DOC officials became suspicious of the documents offered at verification and went to the respondents’ preparation room (typically, respondents will make a well-organized presentation of documents in one room while sorting and assembling them in another) . Although the Crawfish respondent had told the DOC verifiers previously that “the company did not maintain computer records of customers of [sic] business transactions,” the officials found business documents on the computer in use in the preparation room. Following this discovery, things only got worse for the Chinese company. DOC concluded that the respondents were being deceptive and applied punitive adverse facts available, as they did in CLLP. The details of this episode are described in the Crawfish Verification Report.
The respondent Chinese company gave DOC the impression in Crawfish that something was “odd” at verification by its own actions, particularly claiming that computers were not used for maintaining business records while business transactions were found on company computers. In addition, the company’s “accountant” did not have a National “identity” card and apparently was an employee of another crawfish exporter who had been involved in a previous verification for that other company. If these dramatic and unexplained discrepancies were not enough, the electricity did not function during verification in the rooms where DOC was trying to access the company’s computer, leaving DOC officials with little choice but to believe that they were being deceived, as other DOC officials concluded in CLPP.
Trouble Of Watanabe’s Own Making, But In A More Challenging Legal Environment
In the past several months, a pattern has begun to emerge in which DOC has been applying, more often than in the past, “facts available,” and with adverse inferences, to respondents from China. The application of the rules seems to be changing. The DOC and petitioners are more and more suspicious that Chinese companies are falsifying records shown at verification and, therefore, are seeking to confirm the accuracy of those records whenever possible through outside sources. Some petitioners are using former FBI and Scotland Yard investigators to contact companies who supposedly are market economy suppliers of inputs to respondents in China, in order to discredit respondents’ claims of market prices.
CLPP is now one of several cases contributing to DOC’s apparently deep and growing mistrust of Chinese data. The Watanabe Group may, or may not, have been trying to deceive DOC, but in the presence of discrepant data, subsequent to misrepresentation in a previous review, and in a developing context of doubts about the veracity of Chinese verification presentations in other cases, the impression governed. The more Chinese companies rely on deception, or appear to be doing so, to get through verifications, the more they can expect to be exposed and find themselves with prohibitive results. Worried about the expense of legal defense, they are finding themselves having wasted both their money and their time because of an apparent lack of due diligence and care in preparing and hosting verifications. To prevail in trade disputes now, before an ever-more vigilant DOC and ever-more suspicious and skeptical petitioners, Chinese respondents will need to rely on facts they can verify, not fabrication or supposition, and they will need legal counsel with sterling reputations before U.S. agencies to avoid regrettable presumptions.
Winning At All Costs
Unfortunately, as the number of trade disputes has diminished, Chinese and U.S. legal counsel have been promising prospective Chinese clients the impossible, and then have done whatever it seems to take to achieve it. Some routinely promise zero margins in antidumping cases before they have seen company books, and base their fees largely on the contingency of such results. Some have represented more than one company, promising each one a better result than the other with both guaranteeing a fee bonus should it get the best result. One of the companies must lose, but the lawyers in such circumstances have to win.
There may not have been a lawyering issue in the CLPP case. The Watanabe Group’s experience may have arisen from simple misunderstandings. Nonetheless, DOC concluded, as manifested by the application of adverse facts available, that there was deception. When there may be doubt, DOC is now sending a signal that benefits of doubts will not be going to Chinese companies, and the troubles Chinese companies face may be all the more painful for being of their own making.
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