2 State Fraud Probes Open : Bottle and Can Refund Program May Be Victim

State officials are conducting two separate investigations into whether boxcar bootleggers and beverage distributors are defrauding California’s new refundable container deposit program, it was disclosed Monday.

Administrators of the state Department of Conservation, which operates the recycling program, told The Times that they inspected one warehouse that contained 10,000 to 15,000 cases of soft drinks on which the fee of 1 cent per container had not been paid.

Bootleg Aluminum Cans

In a separate probe, officials disclosed that they are investigating whether millions of empty aluminum cans that do not display the increasingly familiar “California Redemption Value” label are being bootlegged into California by railroad. These cans then may be sold for their scrap value and earn an additional 1-cent per can redemption refund--a total of more than $15,000 per boxcar.

In both cases, officials said, the state’s estimated $120-million beverage container redemption fund may have been tapped illegally because no 1-cent deposit was paid by beverage distributors before the soda or beer containers reached the retail market.

State Conservation Director Randall M. Ward said that “by and large” distributors, who helped write the new law, are honest and ethical, but Administration officials feared from the outset that “if there’s a way to make money--legitimately or illegitimately--somebody is going to do it.”

He said that at this point “there is no way of knowing” how much may have been illegally siphoned from the program or how extensive the suspected fraud may be.

Leon Vann, the official in charge of the department’s bottle and can recycling program, said neither investigation is complete and the decision on whether to recommend that criminal charges be filed has not yet been made.

Under the California “bottle law,” which took nearly two decades to enact, soft drink and beer distributors must pay into a special state fund 1 cent for each beverage container. The consumer may redeem the deposit when the bottle or can is turned over for recycling.

Seed Payments

In preparation for the Oct. 1 start-up of the program, distributors began paying “seed money” into the redemption fund in September. When containers are taken to a redemption center, the donor typically is paid at the site.

The state redemption fund is billed by the recycling processor who receives the bottles or cans and makes them into another product, officials said.

To offset their extra costs, the distributor and retailer typically will add 1 cent to the price of the beverage, although some retailers choose to absorb the cost and not pass it along to the consumer, program spokeswoman Merci Azar said.

Acting on a “tip from an outsider,” Vann said, state auditors began investigating a beverage distributor in what he called the Santa Barbara-Oxnard-Ventura area. He said investigators found 10,000 to 15,000 cases of soft drinks in a warehouse and all were “unlabled products.” Each contained 24 containers upon which the 24-cent recycling fee had not been paid.

The cases of soft drinks are presumably being sold to retailers at 24 cents apiece less than that charged by competing distributors who pay the fee. In the extremely competitive soft drink market, a 24-cent saving by the retailer on major orders would be significant.

Vann said the distributor under investigation, whom he refused to identify because the probe is not complete, “is selling that product mostly to small convenience stores in that area.”

Initial Suspicions

At first, investigators believed the soft drinks were bootlegged into California from Nevada, but further examination indicates that they may have originated within California from supplies that were “hoarded” and that other California dealers in the distribution chain may also be involved.

Vann said it could be a month or more before the investigators finish their separate work on the suspected use of railroad cars to transport aluminum cans from out of state into California to collect the redemption fee.

In California, the going rate for aluminum cans is 75 cents a pound, 25 cents higher than any other state, Vann said. “A boxcar full is worth about $15,000 more than anywhere else,” he said.

But he said investigators are uncertain whether a railroad scam is under way. “We had somebody complain and decided to send a team out and do some work,” he said.

“It’s a spider web,” Conservation Director Ward said of the complexity in tracking down distributors who may be violating the law and be subject to stiff fines up to $10,000 and three years in prison.

Retailers, likewise, are subject to both misdemeanor and felony charges.

Tracking System

Ward noted that in anticipation of potential fraud schemes, the department had constructed a computerized tracking system to monitor distribution of beer and soft drink containers.

“As we told the Legislature, we are going to be tracking 12 billion containers representing $120 million a year,” Ward said.

Since Oct. 1, distributors have attached a temporary California redemption label to their containers to cover inventory on hand. However, they have until Dec. 17 to deplete such stock when a permanent redemption label will be stamped into the containers.

Vann noted that critics of the redemption program have complained that 1 cent per container was insufficient to attract substantial participation by consumers. Some critics wanted a 5-cent refund.

“We kept reading that it was ‘only a penny.’ But in California, those ‘only a penny’ deposits add up to $120 million a year and a trainload of ‘only a penny’ is worth a lot of dollars,” Vann said.