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Fighting fraud

Can an honor system unmask seafood scammers?

By James Wright
June 01, 2007

Soon after man learned to fish, he learned to tell a fish story. Economic deception, consequently, has accompanied the seafood industry throughout its history. Each link in the seafood supply chain is increasingly at risk as buyers continue expanding their global sourcing network. Fraud, in its many forms, is costing U.S. seafood companies - and ultimately consumers - untold millions of dollars every year. 
 While the temptation to cheat persists, the industry and federal regulators remain virtually powerless to stop seafood swindlers who falsify product sizes or weights, sell farmed fish as wild or simply substitute an entirely different species.

The National Marine Fisheries Service says it's cracking down on fraud, but admits it lacks the resources to do the job right - a refrain heard throughout federal commerce agencies. But with imports representing about 80 percent of the U.S. seafood supply, and a cash-strapped and embattled U.S. Food and Drug Administration overwhelmed with food-safety issues, the industry is left to police its own fraud cases.

The National Fisheries Institute of McLean, Va., hopes that its Economic Integrity Program, launched earlier this year, will turn the tide. When annual membership fees were due on March 31, NFI required its 241 member companies to sign a pledge to never transship product in an attempt to bypass antidumping and countervailing tariffs; mislabel product or substitute species; or mislabel weights or product counts. Additionally, NFI is forming an independent entity, the Better Seafood Bureau, to arbitrate unresolved disputes among association members.

"The Better Seafood Bureau is an opportunity to resolve complaints and find companies with systematic problems," says NFI President John Connelly. "This isn't about making mistakes. This is about people who systematically cheat. Our members want to identify them and hold them accountable." Connelly says the bureau could be established as early as this month.

However, thousands of seafood companies that are not NFI members will not be held to the BSB code of conduct. And whether the program is successful by any measure will depend on the consequences of non-compliance, says Richard Gutting, a partner in the law firm Redmon, Peyton & Braswell in Washington, D.C., which represents about 60 seafood companies, many of them importers. Gutting, who served at NFI for 20 years, including five as president, says that the association's anti-fraud program will only work if members are willing to report each other.

"There has been an historic reluctance to name names," says Gutting. "But if they don't name names, who will? I guess my questions are: Are there going to be meaningful consequences? Is the culture of the industry ready yet? Is there a willingness on the part of the industry to turn individual companies in? I haven't seen it."

"Be careful who you squeal on," warns Aiden Coburn, director of seafood education and quality control at The Fish Market seafood restaurant chain in Palo Alto, Calif. "Let sleeping dogs lie has always been a motto in this industry."

Fraud in the headlines

What seafood companies have been hesitant to do, the media has done willingly. Over the past year, newspapers and TV news stations reported about a species substitution scandal in Florida restaurants. Samples from prepared fish dishes advertised on menus as grouper, one of the state's premier seafood species, were routinely collected undercover and sent to specialized laboratories to verify the species' authenticity.

In most published cases, the majority of the samples were indeed fakes, typically inexpensive whitefish imports masquerading as more expensive species. As the reports mounted, the restaurants' and their distributors' reputations came into question.

Then in December, Danny Nguyen, owner of Panhandle Trading and Panhandle Seafood in Panama City, Fla., was sentenced to 51 months in prison and ordered to pay the federal government $1.13 million in restitution for selling 1.6 million pounds of Vietnamese basa, a catfish relative, to Florida restaurants and other customers falsely labeled as grouper, channa, snakehead and bass between 2002 and 2005. For law enforcement, the verdict was a stern warning to industry cheats.

"This is not a new issue. It happens all over the United States every day. It's that prevalent," says Ken Conrad, chairman of Libby Hill Seafood Restaurants in Greensboro, N.C., NFI treasurer and a National Restaurant Association board member.

"I'm telling NRA members now that many of them don't have a clue as to what's coming into their back doors. They're not getting the full measure of what they're paying for," Conrad says. "But at the end of the day, there'll always be cheaters."

"[Seafood fraud is] just as rampant as it ever was," says Bob Jones, executive director of the Southeast Fisheries Association in Tallahassee, Fla., who adds that grouper prices paid to Florida fishermen have risen as a result of all the media attention. "You're not going to stop a culture overnight. It's going to take a lot of work."

The media frenzy over species substitution put the heat squarely on restaurants. Coburn, of The Fish Market, says that when the upscale chain's Phoenix restaurant was investigated by a local TV news station a couple of years ago, a simple human error in the kitchen was blown out 
of proportion.

"[The customers] ordered and paid for Pacific rockfish but were served the more expensive New Zealand bluenose. Who lost on that deal? In all fairness, we screwed up and we owned up to it, but what really upset me was [the news station] alleged we were selling Atlantic red snapper when we didn't even have that species in the building," Coburn says. "These folks had made up their mind. They were on a mission."

Under the microscope

Will Gergits, managing member of business development and marketing for Therion International, an animal DNA-testing laboratory in Saratoga Springs, N.Y., has seen his share of fraud in the seafood industry. Therion was sent fish samples from news reporters in the Great Lakes region several years ago to determine if local restaurants were selling walleye, as advertised, or the cheaper substitute, zander, a whitefish farmed in Europe. Visually, there was scant difference between the two species, says Gergits, but walleye cost at least $2 per pound more at the time.

In that initial test, seven of 12 "walleye" samples were actually zander. Since then, Therion has fielded about 30 sets of samples from reporters looking to expose illegal seafood substitution at foodservice outlets; of those, 25 had some substitutions. In most cases, says Gergits, a greater profit margin is the motive, as popular species like cod, mahimahi, red snapper and grouper, all of which can be too expensive for many buyers, are prime candidates for substitution. And since a majority of fish is sold in fillet form, without the buyer ever seeing the fish whole, the opportunities for fraud abound, says Gergits.

"We're seeing substitution across the country now. It's prevalent," says Gergits. "But the substitution can happen anywhere along the supply chain, from the fisherman to the importer or the distributor - anywhere along the way. Certainly there are restaurants doing it. As long as there are humans involved, there's the possibility of corruption."

Therion's DNA-amplification technology is 99 percent accurate, Gergits says, adding that a great deal of his work is for shrimp farmers interested in the genetics of their broodstock. But when hired as a private eye to identify a particular species, Therion looks for "markers" or "primers" that are consistent throughout a species or group of animals. The information collected in any given test is then compared to the data on GenBank, a public genetic-sequence database administered by the National Institutes of Health in Bethesda, Md.

Therion's technology, which Gergits calls the "gold standard," is not infallible, says LeeAnn Applewhite, CEO of Applied Food Technologies, a molecular diagnostics company in Gainesville, Fla. She says GenBank data is not taxonomically verified and that DNA tests are not federally approved for regulatory compliance matters. AFT, which employs isoelectric focusing, a protein analysis technique, has implemented species-identification processes for U.S. Foodservice and Wild American® Shrimp, among other organizations.

"There's no refereeing with the [GenBank] database," Applewhite says. "There are numerous reports of errors. There is no official DNA-sequencing method [approved] for regulatory compliance."

"GenBank is an international service that has served the scientific community for decades," retorts Gergits. "We've testified in murder cases and dozens of other court cases where we've used GenBank information. It's not like a Google or a Wikipedia search. [Applewhite is] just trying to poke holes into a valid scientific resource."

Tricks of the trade

Species substitution garners the most headlines, but mislabeling weights and counts costs the industry the most money, says Randy Petersen, VP of sales for Berdex Seafood in San Francisco. Petersen says excessive glazing or soaking (adding excess water or preservatives to inflate product weight), incorrect sizing and mislabeling weights are 
common offenses. But they're simply not a priority with the U.S. government.

"We were requested by a company we work with to inspect and review products," says Petersen. "They were supposed to be getting one size of shrimp, [but were getting] a significantly smaller size and were being overcharged by 40 to 60 cents per pound. 
It's a significant amount when you're talking about 34,000-pound containers.

"The reason why [fraud] is catching steam is [offenders] know it's not an investigated act. They don't have to worry about it," he adds. "But if the FDA kicked just 10 of their boxes for being short, it would stop them. Even a cursory inspection on master cases will catch it in a lot of cases. But to the FDA, if [the food] doesn't kill you, they don't care. They don't follow up on economic deception issues."

With imports dominating the U.S. seafood supply, many are quick to blame foreign suppliers for fraud. What's more, the Associated Press reported in April that only 1.3 percent of all imported food is actually inspected by the FDA. Connelly, however, is wary of blaming foreign exporters or big-volume importers.

"It's an equal-opportunity problem," says Connelly, referring to the diverse array of interests that approached NFI in 2005 about taking action against economic deception.

"Domestic producers, importers, even a couple of exporters said that our business was not going to be sustainable if we don't keep chasing the folks that are cheating the system," Connelly says.

The urge to falsify size counts or weights or increase water weight to artificially inflate the product's value is a systematic problem, Connelly says, brought on by an extremely competitive market.

"No one wants to cheat," he says. "But in order to compete, some companies do things they don't want to do. With our members, no one is afraid to compete. But they want to make sure everyone is playing by the same rules. Those that take advantage - we don't want them in NFI, and we're willing to take a hard stand against them."

The NMFS Office of Law Enforcement in Silver Spring, Md., is also stepping up efforts to combat seafood fraud. Paul Raymond, assistant special agent in charge of the OLE's Southeast Division, says a task force was established two years ago to snuff out tariff-evading schemes involving Vietnamese basa.

"You'd see, in post-tariff imports, the same importers all of a sudden importing a different critter - snakehead, sole, all sorts of things," Raymond says. "It may be one tiny element, but it can spread throughout the country, impacting hundreds of distributors."

Investigations of other fraud cases, many of them similar in scope to the substitution scandal by Panhandle Trading in Florida, are "progressing along," says Raymond. However, the agency is hamstrung by a lack of resources to effectively tackle mislabeled product weights and other scams. "To be frank, we don't have the manpower to deal with that," says Raymond. "We know the reality. We have to pick our battles."

Market acceptance

Berdex Seafood inspects every container of shrimp for size 
and quality before it is placed 
on a container ship for ex-
port, says Petersen. But not all companies can afford to take such precautions.

"In all honesty, with a lot of buyers, [buying short-weighted product is] just a 'course-of-doing-business' kind of thing," he says. "It's the grade-B distributors and second-tier retailers that are being impacted. It's the restaurant group accountant figuring out why his gross revenue isn't keeping up with costs. He's losing shrink and doesn't even know it."

Eventually, the higher cost gets passed on to the consumer.

"Any time you see mislabeling of product, and some of this may be intentional or accidental, it leads to marketing deception, and consumers have the ultimate right to know that the product they're buying is exactly as advertised," says Roger Barlow, president of The Catfish Institute in Jackson, Miss. "I believe there need to be fines and legal ramifications for deceptive marketing when proven. I certainly support anything that tries to maintain the integrity of the industry."

Tough talk needs tough action. NFI's economic integrity pledge only represents a small fraction of a fragmented industry, and the Better Seafood Bureau will have no authority over non-NFI members. The industry or the government may propose more regulations, but the question remains: Who will enforce them?

Retailers currently must comply with Country of Origin Labeling (COOL) laws, while foodservice outlets are not required to disclose the origin of their seafood. But, in light of the ongoing species substitution scandal, many foodservice operators feel the winds are blowing in that direction.

"The only reason [COOL for restaurants] hasn't been implemented is the cost. It's just like HACCP," says Coburn. "It's an awful pity God didn't put a ZIP code on the side of fish, isn't it?"

Assistant Editor James Wright can be e-mailed at jwright@divcom.com

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