Seafood Fraud: How the Codfather Case Helps Combat Mislabeling

Seafood Fraud: How the Codfather Case Helps Combat Mislabeling

0:00:00.7 John Sheehan: Back in 2016 a massive criminal fraud case shook the fishing port city of New Bedford, Massachusetts.

0:00:07.3 Speaker 2: He's a big name in local fishing circles.

0:00:09.9 Speaker 3: One of the largest commercial fishing fleets in the country.

0:00:13.9 Speaker 4: Disgraced fishing tycoon known as The Codfather.

0:00:14.8 Speaker 5: The Codfather admitted to more than two dozen criminal charges.

0:00:19.1 JS: And today, the story of The Codfather remains a salient example of the harm, both to communities and to fisheries, that can occur when bad actors mislabel their catch, abuse quota systems and otherwise break fishing regulations.

0:00:32.8 JS: The small mom and pop businesses, fishing businesses, we're struggling to keep afloat. The industry is better off with bad actors like this not fishing any longer.

0:00:41.3 Geret DePiper: There were real consequences with respect to his actions on other people, other fishing businesses, as well as impacts throughout the management system.

0:00:51.5 JS: This is Dive In With NOAA Fisheries. I'm John Sheehan. And today we'll hear how The Codfather exemplifies the importance and necessity of NOAA's Office of Law Enforcement, and how newly published research using The Codfather as a case study is giving regulators and law enforcement a new tool to sniff out fraud and prevent the rise of future codfathers.

0:01:11.7 GD: Anytime you're able to increase the probability of cheaters being caught, it's a really valuable addition to the manager's arsenal.

0:01:21.2 JS: We'll hear about that a little later. But let's start with the story of The Codfather, Carlos Rafael.

0:01:26.5 Troy Audyatis: Yeah. To give you a little background on Carlos...

0:01:29.7 JS: This is special agent Troy Audyatis of NOAA's Office of Law enforcement.

0:01:34.7 TA: Carlos immigrated to the United States about age 15 from Portugal. He almost immediately began working in the commercial fishing industry. First as a laborer, then as a fish cutter. And eventually he bought a filet house. He bought a boat. One boat became two, two became four. He built himself an empire. At the time of this investigation, Raphael owned approximately 40 commercial fishing vessels and 60 federal fishing permits. He controlled a large percentage of the northeast ground fish permits. He was responsible for hundreds of fishing related jobs in New Bedford, Massachusetts.

0:02:07.4 JS: And in some ways that sounds like a kind of an American dream story. Started out buying a humble fishing boat, created an empire.

0:02:16.1 TA: Yeah, he actually knew the definition of hard work. I mean, Carlos might have been a lot of things, but that guy could work. In Carlos's office, he had a poster of Tony Montana, the Scarface, and he was fascinated with that type of lifestyle, hence the nickname, The Codfather. He's got a larger than life personality. If you were standing in a room with Carlos, you would definitely know it for sure. He's loud. Wherever Carlos is, you'll probably smell cigarette smoke. He's constantly chain smoking, constantly on the cell phone, making the next deal.

0:02:48.8 JS: Now, the details of the circumstances without a doubt make for a good story. IRS agents disguised as Russian mobsters, duffle bags of cash in international smuggling. Even the nickname The Codfather, which was probably as much the media's doing as an actual nickname, all of it makes for a good yarn that I certainly enjoyed hearing about. But it's also important to remember that real people were hurt in the course of this sprawling criminal enterprise, and I don't want to give the impression that we're making light or excusing any of it because this is a cautionary tale.

0:03:22.7 TA: Raphael was no stranger to the law enforcement. He actually stated once, "I'm a pirate. It's your job to catch me." He's got a lengthy history. So in 1987, he was convicted of tax evasion. 1994, he was charged with price fixing. 1999, he was charged with false statements on federal forms. So he has countless run-ins with NOAA Fisheries' law enforcement and state environmental police officers for his entire career. So you can say Carlos and his captains were absolutely no stranger to our office. At the time, obviously, he owned one of the largest fleets on the East coast and it was common for us to see him 'cause he owned such a large piece of the industry. We would have interactions with him almost on a daily basis, not necessarily for law enforcement, but with OLE, we feel like we need to be in touch with the folks that we police. They can't just see us when there's a violation. They need to see us on the daily. But with Carlos, we had really no idea the depth of what was truly going on until we conducted this investigation.

0:04:20.7 GD: To give you a scale of his crime, he was convicted of falsifying records on 800,000 pounds of fish over the course of a number of years.

0:04:33.1 JS: This is Dr. Geret DePiper, a research economist at the Northeast Fishery Science Center.

0:04:37.2 GD: He controlled roughly 40 vessels, which harvested species like cod, haddock, scallops, and lobsters to name a few species. He worked primarily out of the new Bedford, which is the highest valued port in the country with respect to seafood sales. He also held a dealer permit, which meant that when he was ready to sell his catch, he didn't actually have to work with an outside entity. He didn't have to work through a seafood processor, a wholesaler, for example. He could work primarily through himself and still get that seafood to market.

0:05:07.5 TA: He was vertically integrated, which means he owned a large fleet of vessels. He also owned Carlos Seafoods, which is a federal permitted seafood dealer, and his boats would sell to Carlos Seafoods. And Carlos Seafoods had a bunch of pretty good contracts with other fish dealers down in Fulton Fish Market in New York. Nothing's illegal about that. It's how he ended up reporting his fish.

0:05:30.4 GD: Put simply, Mr. Raphael was mislabeling one species of fish for another species of fish in the federal records. And what he was doing then was smuggling those ill-gotten gains from this activity outside of the country. So over the normal course of the business, he would be selling through regional display auctions. And these are large auctions that allow buyers of seafood to inspect that seafood for quality before they bid on it. And these auctions were set up explicitly to increase the transparency in the market. So when he wanted to mislabel, he'd be selling the fish to himself, or he'd be bringing the fish to market through his own dealer permit. And so there was no need to interact with a third party.

0:06:10.2 JS: And this was going on for years. Carlos would say he was catching low value fish, of which he owned lots of quota, when really he was catching high value fish and drastically exceeding the quota. And his fleet and seafood company were big enough that he got away with it for a time.

0:06:28.9 TA: In 2015, he announced that he was gonna sell his business. We took that as a perfect opportunity to approach Raphael to buy his business. We had a couple IRS agents posing as Russian organized crime approach Raphael to offer the buy his business. Now, these undercover agents were amazing. They're from Russian descent. They were kinda like dripping in gold, driving a fancy sports car. They've really played the part. And Raphael bought into this hook, line and sinker. I mean, we captured a 15 hours of audio and video of Raphael telling us exactly what he did and how he did it. It was absolutely beautiful.

0:07:08.2 JS: And you can hear some of this undercover audio online in news stories reporting on the case at the time. We're not playing any of it here because it's quite profane and actually a little hard to make out through all the breathing.

0:07:23.2 TA: He told us about a cash for fish deal he had with a New York fish dealer. I'm not talking about envelopes of cash, I'm talking about duffel bags of cash. Hundreds of thousands of dollars at a time. Raphael would pay this cash back with fish. So he would receive $600,000 in cash. He had to pay back $660,000 in fish. And he says, "I'd much rather pay him his 10% than the IRS their 30." So Raphael disclosed that he had foreign bank accounts and he actually utilized a local sheriff's deputy working as a task force officer at Logan International Airport to help him smuggle a portion of his proceeds overseas to Portugal. Raphael also told us about how he manipulated the sector management scheme to circumvent his quota and maximize his profits. Raphael would say, "Hey, I've got 9 million pounds of haddock. I'll never catch 9 million pounds of haddock." So why not call everything he catches haddock? His boats and his business purchased and landed thousands upon thousands of pounds of haddock. But his sales records showed a completely different story. That he was actually selling codfish, dabs, gray soul, yellow tail, and hardly any haddock. During the execution of the search warrant in February 2016, we found his business records, including that cash ledger with that New York fish dealer with trucking records, invoices, everything we needed logged down to every single day, every single dollar, every single penny.

0:08:57.4 JS: So what was the end result? Because you had him, you had him dead to rights.

0:09:02.9 TA: Definitely. Raphael was indicted and eventually pleaded guilty to filing false reports, bulk cash smuggling, conspiracy and tax evasion. He served, well, he was sentenced rather to 46 months in federal prison. On the civil side of the house, NOAA issued what we call a notice of violation and assessment or a NOVA, where he had to pay over $3.3 million in fines and penalties. He was ordered to relinquish his federal permit for Carlos Seafood, and he was also forced to divestiture and permanent banned on commercial fishing for life. And 17 of his captains were also charged civilly, And they served to combined 1320 days of permit sanction, 382 months of probation, and they was subject to enhanced reporting requirements.

0:09:52.0 JS: And we'll hear more about Carlos in a minute because his story doesn't end there. But let's remember, this isn't just about fish, it's about people.

0:10:00.1 TA: Raphael was thriving due to this illegal scheme he was pulling off over that law abiding commercial fishermen that was struggling to make ends meet.

0:10:08.1 GD: So the way he was mislabeling is he was mislabeling into what's called the northeast multi-species ground fish fishery. That encapsulates 13 different species managed as 20 different stocks. And there's a total allowable catch that's associated with that. Of all those stocks, an X number of pounds of each of those stocks can be harvested out of the ocean. The other interesting thing about the management system is that there's a transferable quota. And so, groups of fishermen called sectors were allocated a fraction of that total allowable catch, and that fraction was predicated on the history of that group of fishermen. So how much of those species did they catch historically? Once they received that allocation, they're actually allowed to trade it for cash. And so what Mr. Raphael was doing was reporting low quantity high price quota as high quantity low price quota. And so he was saving that cost in terms of that quota usage. But what that means in terms of the other fishing businesses is if a fisherman went to sell some of that quota from that low quantity high priced species or stock, they were getting a unnaturally low price for that. So he's pulling money directly out of the fisherman's pocket by artificially decreasing the price that they could have gotten for that stock.

0:11:31.9 JS: So it's not just that Raphael was cheating and mislabeling to hide the value of his catch, he was also devaluing quota for the other small fishing businesses.

0:11:46.3 GD: Obviously, once he got caught, that undermines the credibility of the management system. Now, the people that are following the rules are the ones that actually got hurt the worst with respect to this mislabeling. The other thing it did is it kind of undermines the entire rationale for a quota management system in the first place or a transferable quota management system. And that's because the prices of that quota are the signals that fishermen get to move off of low availability stocks and start to target the high availability stocks. If that price is deflated, then more of that stock is gonna be landed or caught than would otherwise happen if those prices were correct. And so, on a large enough scale, that can actually impact the population dynamics of those stocks and make it harder for those to rebuild into the future. And so you can get a vicious cycle where the individuals who are mislabeling are given an advantage with respect to those individuals that are actually following the rules. It can actually change the fleet composition such that those individuals, small individuals that are following the rules get pushed out. And it can be extremely difficult to unwind those long-term consequences even after the individual, say like Carlos Raphael, is caught.

0:13:00.9 TA: And that's our main job here at OLE, is to level that playing field for that law abiding fishermen and their families and industry members. We're constantly learning new ways to do our job. We're constantly evolving. We're incorporating a lot of technology into our investigations. We couldn't pull off a case like this without the help of all divisions within NOAA.

0:13:24.4 JS: And this is where we get to Dr. Geret DePiper new research just published in the RAND Journal of Economics.

0:13:31.4 GD: Yeah, so what our research found, it was research that I undertook jointly with Dr. Jorge Holzer, who's associate professor at the University of Maryland in the Department of Agricultural and Resource Economics. And what we found is that you can use prices of seafood to actually uncover likely cases of mislabeling. And that's pretty a novel approach to identifying mislabeling. The traditional way to do it is by genetic testing, which is much more expensive and takes a lot more time than looking at the prices themselves.

0:14:02.6 JS: Yeah, yeah. And let's talk more about that because what your research effectively shows, correct me if I'm wrong, is that you can sniff out cases of of mislabeling or of fraudulent activity because of how the market responds.

0:14:18.9 GD: Yeah, that's exactly right. We rely on the law of one price, and that basically states that, say for example, a price of haddock, barring any market frictions, that price should be constant across wherever it's sold. And so we look for deviations from that price that can't be explained by market factors like the quality of the fish, the size of the fish or the age of the fish when it was sold. And we exploit that to identify likely instances of mislabeling.

0:14:48.1 JS: Which is fascinating because I think, to an observer, looking at one set of auctions, you might not be able to tell what's necessarily happening, but by taking the large view, the long view maybe, you can start to see these trends appear and that's when it reveals itself.

0:15:02.3 GD: Yeah, that's right. It's over the long term and over repeated actions or trades that we can assess what's likely to be attributed attributable to the market itself versus what's likely to be mislabeling. If the scale of mislabeling is at a level in that it changes the population dynamics of low abundance stocks, that changes what seafood is locally available in terms of the fresh seafood. And so that impacts consumers directly. The other way it impacts consumers is it feeds into the entire ecosystem of seafood fraud. There's suggestions that this ranges anywhere between 15% to 25% of seafood sold based on tests done by the Food and Drug Administration as well as some researchers. But even if those numbers are off, to some extent, it indicates the scale at which seafood mislabeling and seafood fraud more broadly is a problem. And that really undermines consumers confidence in the seafood that they're buying and the management system.

0:16:05.9 JS: Yeah, managers aren't getting the right information and it's impacting the resource. Do you think that with this new tool you have identified, that there's hopefully potential to chip away at that percentage?

0:16:18.5 GD: Yeah, I think we demonstrate that prices can be used in terms of identifying likely mislabeling. I think actually the tool, even though we focus on a very small corner of the market with respect to the research itself, using prices as an instrument to identify fraud more broadly, I think is an approach and a technique that is underutilized at the moment. And just to give you a sense of the scale of the issue globally, there's some estimates that suggest that up to 10% of all food goods are mislabeled or somehow fraudulent, using fraudulent or lower quality ingredients or some other way, that quality of that good is not the what you thought it was. And you only need to look at the popular press to see examples of this. So over the last couple years, you can see anything from high valued art to expensive wine to baby formula to pet food to olive oil. And I'll note that it's really not just rank and file consumers that fall prey to these fraudulent schemes. As an example, in 2023, the largest copper producer in Europe and a major global commodities trader, both were taken for fraudulent schemes that amounted to over $500 million of losses for those two companies. And so the scale is enormous with respect to this. So anytime we can increase, like I mentioned earlier, the manner in which we can uncover mislabeling or fraudulent activity, it's a really valuable instrument for society.

0:17:55.8 JS: Dr. Geret DePiper is a research economist at NOAA's Northeast Fishery Science Center. His research co-authored with Dr. Jorge Holzer of the University of Maryland was just published in the RAND Journal of Economics. Troy Audyatis is a special agent of NOAA's Office of Law Enforcement or OLE. And The Codfather, Carlos Raphael.

0:18:18.4 TA: Yeah, he is out of prison now, and on occasion, you can in fact see him on the New Bedford Waterfront. Obviously not engaged with the commercial fishing industry anymore, but you do in fact see him. I imagine he's probably enjoying retirement. I've heard different rumors possibly dabbing in commercial real estate.

0:18:33.4 JS: And he sold his fleet. He's not doing badly.

0:18:38.4 TA: No, no. He was able to sell the fleet, sold out on the open market. We actually seized two of Carlos's vessels during the entire criminal proceeding, but he was able to sell the remainder of his fleet in the open market. And you can in fact see some of those boats today in New Bedford. They're just painted a different color owned by a different company.

0:18:57.3 JS: As always, you can learn more at our website, fisheries.NOAA.gov. I'm John Sheehan, and this has been Dive In With NOAA Fisheries.