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States address UBC fraud as legitimate yards suffer

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In the past few months, state bottle bills have drawn much media attention in Iowa, Maine, Massachusetts, Michigan and Vermont as legislators successfully warded off attempted repeals and introduced bills to expand material collection. However, none raised the burning issue that continues to bedevil legitimate aluminum scrap recyclers: fraud.

Although the five states have yet to witness the blatant abuse of their deposit schemes by fraudsters from surrounding, non-deposit states, scrap dealers in Arizona, Nevada and New Mexico warn of impending doom if corrective action isn’t taken soon.

"Our UBC (used beverage container) collections have dropped 60 percent since illegal profiteers devised a way to scam California’s redemption fund," one Mesa, Ariz.-based recycler said. "We’ve tried to get the local media to raise awareness in an attempt to keep people away from those operations, but have had little success to date. Our collections are still suffering."

A special report by AMM in February showed that a large group of UBC buyers in Arizona had priced traditional scrapyards out of the market and usurped more than half the market during the past 18 months.

During an investigative trip to Arizona, AMM saw dozens of one-man operations buying UBCs at between 90 and 95 cents per pound—46 percent higher than the going dealer rate at the time of 60 to 65 cents for the metallic content in a pound of aluminum cans. In March, the same operators wasted no time in responding to higher aluminum prices, openly advertising rates of $1 to $1.10 per pound, while the country’s largest consumers—Evermore Recycling LLC and Anheuser-Busch InBev SA—were paying between 89 and 91 cents per pound for UBCs. Meanwhile, members of the Institute of Scrap Recycling Industries had pushed their numbers up to around 70 cents per pound for the metallic content, maintaining a 20-cent spread to cover the cost of cleaning, partially processing and baling material.

To scrap industry players, this smacks of fraud. Scrapyard owners in Arizona and Nevada allege that the people paying higher prices for cans were taking the material into California to take illegal advantage of the state’s lucrative redemption value. Officials at the California Department of Resources Recycling and Recovery (CalRecycle), the state’s redemption fund, echoed the allegations.

California collects a fee of 5 cents per can and refunds it when the can is returned. Since a pound of metal usually is comprised of 30 cans, a refund of $1.50 per pound comes in addition to the actual metallic value of the cans. As a result, at early March values UBCs recycled in California were worth about $2.20 per pound.

So how do the alleged illegal operators make their money?

"In California, a legitimate recycler will only make money on the metallic value. But the illegal operators make money on the refund and the metallic value. They collect the full $2.20. If they paid $1 per pound, they split the $1.20 profit between the people running the operation outside California and the centers in California that are accepting the material," a second Arizona recycler alleged.

AMM visited and successfully sold used cans to many of the one-man operations at 90 and 95 cents per pound, confirming that the practice is in abundance in Arizona. While it isn’t illegal for traders in Arizona to buy cans at any price or for them to take them to California to sell for the metallic value, it is illegal to reclaim the state’s redemption value for out-of-state cans.

A few days after the investigation in Arizona, AMM met with CalRecycle officials in Sacramento to ascertain what the state was doing to curtail the alleged fraud. Since June 2010, the state has arrested 39 people, 34 of whom have pleaded guilty to defrauding the state.

California’s most recent arrests highlight the alleged fraud. Three people—Howard Leveson, 68, owner of Perris Valley Recycling Inc.; Jose Barragan, 35, its general manager; and Susie Ambriz-Molina, 25, an office worker at the Perris, Calif., company—were arrested on Oct. 12 "for bilking the state’s beverage container recycling program out of $7 million," the state attorney general’s office said. The arrests came after a five-month investigation tracked deliveries of out-of-state UBCs from Arizona to Perris Valley Recycling, about 70 miles east of Long Beach.

Under a plea deal announced in March, Leveson admitted possessing an assault weapon and was ordered to pay CalRecycle $1.5 million and to pay the California Bureau of Investigation $100,000. He also forfeited his Toyota Landcruiser. The other two defendants are scheduled to appear in court April 7.

Jason Marshall, CalRecycle’s deputy director, is content with the progress of enforcement to date. "We think the busts are serving as a deterrent. Part of the reason is we’re somewhat shameless in spreading the word. We’ve told every recycler in neighboring states: ‘We may be talking about a California criminal prosecution against you (if you redeem out-of-state containers).’ So they’re probably not going to come visiting California anytime soon unless they’re looking for an arrest.’ "

Acknowledging the existence of fraud, Marshall said he was unable to determine its extent. The unwillingness of the UBC industry to share its numbers has made it difficult for the state body to determine the extent of resources that should be dedicated to enforcement.

"We don’t know how much fraud there is. If you knew how much, you wouldn’t have the fraud because you could get rid of it," Marshall said. "If I knew what their business was, and how much it was down, it would help us know the size of the fraud. When we make a bust and we say we just rolled up 1.6 million pounds of cans and bottles, what is that relative to the overall picture that has gone missing? In 2009, we collected 8 billion containers, which equals about 250 million pounds, so 1.6 million pounds isn’t a big deal relative to our recycling rate. But what was the market in Arizona? That would help us know how much of it is coming over. How much of our collection was fraud? We don’t know that."

Arizona’s scrap recyclers estimated that monthly collections totaled 1.5 million pounds before the proliferation of the alleged fraud. With 60 percent of that share reportedly lost to the new operators, that translates to 900,000 pounds per month, or 10.8 million pounds annually. By Marshall’s reasoning, that would equate to around 4.3 percent of the state’s collections.

That’s a significant number, a source at CalRecycle acknowledged, "but without actual numbers from the industry there’s no way to draw up a revised action plan based on unsubstantiated estimates."

However, Arizona’s recyclers said the exchange of information needs to be a two-way street. "When we speak to California they say they need to catch these guys selling to a scrap metal facility in California," the first Arizona recycler said. "They haven’t been forthright with information. When I see that they are making arrests, I think maybe they’re trying to keep it low key because they don’t want to reveal who they are investigating. But the out-of-state operators are the problem feeding itself to California’s problem, so why not take the next step and plug the damage?"

While California and its neighboring states struggle to find effective solutions to dramatically reduce, if not eradicate, such alleged fraud, other states should use it as a cue to fix their own enforcement legislation. Without effective solutions, other states with deposit schemes could easily face similar problems—but industry sources in the Midwest and Northeast said that other states still consider fraud to be minimal.

"States with bottle bills and deposits will have to take this matter seriously. It’s true that even fraudulent operators help recycling efforts by keeping litter off the streets, but when it hurts legitimate scrapyards, that’s a problem. As out-of-state fraud grows, it can easily bankrupt deposit funds," one Midwest industry participant said.

In Michigan, a 10-cent deposit allegedly continues to attract out-of-state fraud, but the state doesn’t have adequate resources to tackle the issue, said Kerrin O’Brien, director of the Michigan Recyclers Coalition. "It is still a problem. It’s a hard law to enforce, but the state increased penalties two years ago and that’s made a difference."


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