Attorneys with the U.S. Department of Justice are accusing companies Kloosterboer International Forwarding and Alaska Reefer Management of secretly using a specially built rail track in Canada for years, in order to evade the requirements of a maritime shipping law called the Jones Act.
The accusation surfaced in a filing submitted Friday in a case involving the two companies, which help transport Alaska seafood to the East Coast. The companies potentially face massive fines, imposed by the U.S. Customs and Border Protection.
The government’s 43-page response is its first public explanation in the case brought by Kloosterboer and Alaska Reefer Management early this month in U.S. District Court in Anchorage. The two companies provide transportation and logistics services as part of the American Seafoods Group family.
The companies are suing the Department of Homeland Security and its division, Customs and Border Protection, to stop the large penalty notices, which they say arrived without warning.
The penalties for Kloosterboer alone total $25 million, the companies’ complaint says. Numerous other companies in the plaintiffs’ supply chain have also received notices totaling more than $325 million, their complaint says.
The companies argue that the seafood has been properly shipped from Dutch Harbor in Western Alaska to the Eastern U.S. for more than 20 years, passing through the port of Bayside in Canada near the border with Maine.
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The companies say the penalty notices have threatened the distribution of that seafood — typically pollock caught in the Bering Sea, bound for fast-food restaurants and other outlets.
Kloosterboer and Alaska Reefer say they comply with the Jones Act. The Jones Act requires that vessels carrying goods between two U.S. points be American-made and American-flagged. The companies use foreign-flagged vessels. But they say they meet a Jones Act exemption because the seafood travels briefly by rail in Canada.
At issue is the rail line used to meet that exemption.
The U.S. Department of Justice says “all was good” before 2012.
In those years, the companies complied with the Jones Act by using the New Brunswick Southern Railway to transport their seafood in Canada, a journey of more than 30 miles, the federal response says. But in 2012, the companies “radically” altered the movement of the seafood because they believed using the New Brunswick railway was too expensive, the federal response says.
Instead of using the established New Brunswick railway and moving product from one destination to another using a “through route,” the companies decided to use “a specially-built mini-railtrack, approximately 100 feet in length, that goes nowhere,” the federal government argues.
That rail line is called Bayside Canadian Railway. The seafood is loaded into trucks that travel on a flat rail car, back and forth on the track, for a total of 200 feet. It’s then driven into the U.S.
The “actions were not a one-time error or oversight, but rather part of a calculated and secret scheme to find a loophole in the Jones Act, which was only revealed when the government received a tip from a third party,” the federal government argues.
Officials with Kloosterboer and Alaska Reefer declined a request for an interview, citing the ongoing litigation.
According to a 48-page response filed on Wednesday, Kloosterboer and Alaska Reefer say the newer Bayside Canadian Railway meets the Jones Act exemption and complies with Customs and Border Protection ruling letters.
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The rail line is “indisputably a registered Canadian rail line; the goods are loaded onto it and travel a short distance,” the companies say.
Customs and Border Protection has never said the rail line must be a certain length or connect two distant points, the companies argue. The line is part of the “through route” from Dutch Harbor to the Eastern U.S., the companies argue.
“There is no practical difference between the (original railway and the newer one),” the companies argue. The only difference is the location and length, they say.
The federal government says the prior ruling letters from Customs and Border Protection predated the existence of the Bayside Canadian rail line and “never sanctioned” it.
It asserts that the companies did not provide adequate documentation to note the change in rail lines.
The companies say they have “been transparent” about the rail line’s use. They say Customs and Border Protection has been “on notice” about the newer line since 2012. Receipts provided to the agency during those years have described thousands of shipments along the rail line, the companies say.
The companies say the penalty notices themselves are unjustifiably large and were issued without proper notice.
The federal government argues that the penalty notices are the size they are in part because of the length of the violations. The companies can challenge the penalty notices and explain their position through an administrative process, the federal government says.
A spokesperson with Customs and Border Protection said the agency does not comment on pending litigation.