Customs Service investigating scam involving contraband apparel ring. (Up Front).

The U.S. Customs Service is investigating the diversion of Mexico-bound apparel shipments that are ending up in American retail stores after arriving in Los Angeles.

The probe is targeting several individuals, locally and in Asia, and involves the smuggling of more than 5,000 containers worth up to $500 million during the last three years. U.S. Customs officials said. The diverted cargo has avoided $60 million in duty fees over that time.

The scheme, which officials believe has been committed by the same set of individuals both locally and overseas over the years, raises concerns about security at local ports, where cargo is sent before being trucked to Mexico.

In the past, cargo smuggling has usually involved diversion of goods from China to countries such as Cambodia and Vietnam, where new labels were sewn into the garments.

"I never would have imagined that people would be smuggling in 5,000 containers of goods or that it was even possible," said Robert Kreiger, president of Norman Kreiger Inc., a freight forwarding and customs brokerage firm.

News of the investigation came to light late last year when Janet Labuda, director of Customs' Textile Enforcement and Operations division, addressed a New York meeting of the U.S. Association of Importers of Textiles & Apparel and American Import Shippers' Association.

She informed the group the government was investigating the smuggling of the apparel that was coming from China through Los Angeles ports with forged documents showing they were to be trucked to Mexico or farther south when, in fact, they were staying in the U.S.

China is a major exporter of apparel to U.S. manufacturers, who often design their goods here and have them sewn in Chinese factories where labor and operating costs are considerably less expensive. But the U.S. imposes import quotas and tariffs on the cargo when it enters the country.

Last week Labuda declined to say how far along the investigation was. "We've got somebody who has been trying to gain the system, but as a result I can't say anything because I don't want to give anyone any ideas' she said.

Closing loopholes

Customs officials said that after discovering the scam late last year, they worked to solve the problem. "We immediately took steps to close the loopholes and change our operations to make sure this could not happen again," said John Heinrich, director of field operations for the U.S. Custom Services' South Pacific Management Service in Long Beach.

He too declined to outline how the scheme took place or describe what loopholes were closed and whether that has been effective.

Local apparel industry executives have been warned about the smuggling and cautioned to check the packaged goods they buy through importers and overseas sources to make sure they have all the correct documentation.

The California Fashion Association, a trade group in Los Angeles that monitors the fashion industry, sent a memo to members late last year indicating that smuggled goods were being sold to manufacturers and wholesalers on a delivery-duty paid or landed-duty paid basis. That means the import duty was included in the purchase price and the manufacturers did not have to get the goods through U.S. Customs.

"Customs knows that many companies have been unaware they were purchasing smuggled goods," the memo said. "We suggest that anyone who has purchased or is purchasing apparel for packaged goods' delivery...be aware of the forthcoming scrutiny."

Elon Pollack, a Los Angeles customs attorney, said he has several clients involved in the inquiry, but would not divulge names. "All I can say is that the investigation covers a wide range of people, some of whom are sitting in Asia, some of whom are sitting here, and some of whom are in parts unknown;' he said.

He said some of his clients have gotten seizure notices for women's, men's and boys' apparel the U.S. Customs Service believes was illegally shipped to this country. Also, Chinese officials have seized computers and records at several Hong Kong businesses, Pollack said.

Locally clothing manufacturers have felt the effect of the smuggled goods, noting that it is hard to compete with the prices they fetch.

"We were talking with a retailer recently about selling them jeans, and we were competing with another company. No matter what price we gave them on our pants, the Chinese company had a better price;' said Paul Guez, co-owner of L.A.-based Azteca Productions International Inc.

Guez noted that the competition undercut his price by $1.25 a pair. But the retailer, he said, never got his blue jeans, Guez said. They were stopped and seized by the U.S. Customs Service for illegal entry.