Pirates of the North Atlantic

The Golden Age of Piracy was short-lived — lasting just 75 years, between 1650 and decreasing rapidly by the late 1720s. (See “The Golden Age of Piracy,” Royal Museums Greenwich.) Some historians consider the last pirate of the North Atlantic to be the ruthless Spaniard Don Pedro. He would hide his fast Baltimore clipper, Panda, in coves along the North Atlantic coast and lure larger, slower merchant vessels closer with phony distress signals. The Panda crew would then overpower the ships.

However, Pedro’s hasty and ill-conceived maneuver in the Panda against a brig — a type of sailing vessel — in open waters off Florida eventually led to his being caught, tried and hanged in Boston in 1835. (See “Don Pedro: The Last True Pirate to Raid the Atlantic,” New England Historical Society.)

But perhaps Don Pedro wasn’t the last pirate of the North Atlantic. 

Rise of  New Bedford’s ‘Codfather’: Carlos Rafael

New Bedford, Massachusetts, was once the whaling capital of the world in the 19th century, but today, fishing fleets of all sizes pursue a variety of groundfish (fish that feed near the bottom, such as halibut, pollock, flounder and others). In 2019, nearly $451 million worth of seafood passed through the New Bedford waterfront, making it America’s most lucrative seaport for 20 consecutive years. (See “New Bedford is America’s most lucrative fishing port for 20th straight year,” by Ted Nesi, wpri.com, May 20, 2021.)

Just a few short years ago, one man controlled a substantial portion of that catch: Carlos Rafael, who was once called “the most powerful fisherman in America’s most valuable seafood port.” (See “The Deliciously Fishy Case of the ‘Codfather,’” by Ben Goldfarb, Mother Jones, March/April 2017.)

Rafael was a brusque, shrewd, Portuguese commercial fishing mogul who the local media tagged with the moniker, “the Codfather,” because of his large and constant presence on the New Bedford waterfront and his growing realm. Since emigrating to New Bedford from the Azores as a teenager in 1968, Rafael had built a commercial fishing empire beginning with one boat in 1981 that grew to a fleet of 40 vessels over the years. 

The Codfather no stranger to criminal activity

Rafael began his foray into criminal activities shortly after arriving in New Bedford when he received a six-month sentence for tax evasion. He was indicted (but acquitted) on price-fixing charges in 1994. In 2011, federal agents confiscated an 881-pound tuna (worth about $18/pound at the dock when fully dressed) that Rafael illegally netted aboard one of his ships. 

Rafael would quickly snub his nose accompanied by a flourish of profanity at anyone he perceived would get in his way. He once arrogantly challenged regulators, “I’m a pirate. It’s your job to catch me.” (See “The ‘Codfather’ was a seafood kingpin, until fake Russian mobsters took him down. Now he’ll never fish again,” by Antonia Noori Farzan, The Washington Post, Aug. 20, 2019.)

Brash statements like that put you on the radar of federal agencies.

The Codfather’s scheme used a NOAA regulation loophole

To understand Rafael’s fraudulent schemes, it helps to examine how the fishing industry is regulated. Commercial fishing boats must complete detailed reports every time they return to port with their catch. Seafood dealers likewise must submit details of the catches they buy from incoming ships. The National Oceanic and Atmospheric Administration (NOAA) uses both reports to verify commercial fishing accounts as a system of checks and balances to help ensure sustainable fish stocks. If the seafood dealer (buyer) is a separate entity from the ship representative (seller), all’s good. Theoretically.

As an owner of both a fleet of fishing vessels and a seafood dealership, Rafael saw an opportunity to streamline his operations by taking direct ownership of both the catch-selling and catch-buying stages. This vertical integration was the regulation loophole (one of many) in the NOAA reporting process Rafael needed. He tweaked the scheme even more by having his captains misrepresent their catches so he could falsify the dealer reports to align with the “cooked” catch reports. Regulators were none the wiser.

For years, Rafael sold thousands of pounds of misrepresented catch for cash “under the table” to Michael Perretti, a Fulton Fish Market dealer in New York. He did this by telling NOAA he’d caught fish like haddock, which is an abundant species subject to high quotas, when in fact his haul comprised rarer fish like cod or sole that are subject to strict quotas. Rafael then enlisted the help of Antonio Freitas, a corrupt sheriff’s deputy, to smuggle the ill-gotten cash out of the country to Portugal. (See the Mother Jones article and “Owner of One of the Nation’s Largest Commercial Fishing Businesses Sentenced for Falsifying Records & Smuggling Proceeds Abroad,” DOJ, Sept. 25, 2017.)

‘Russian mafia’ smells something fishy

By early 2015, Rafael was ready to exit the fishing fleet and dealership business and eager to unload his assets worth tens of millions of dollars. Several months later, three potential buyers — two supposed members of the Russian mafia and their broker — showed up at his warehouse ready to make a deal for his seafood company for $175 million. (See Mother Jones article.)

Believing he was in the company of like-minded criminals, Rafael obligingly revealed the details of his scam, including how he overvalued his seafood company by eight times to the IRS and how it was the perfect money-laundering operation. (See The Washington Post article.) He even joked that, “You could be the IRS in here. … So I’m trusting you.” (See “Owner of seafood supplier arrested on federal fraud charges,” by Shaun Towne, wpri.com12, updated, Feb. 26, 2016.)

As it turns out, the man posing as the Russian broker was an IRS undercover agent, Ronald Mullett. His team spent eight months developing the case against Rafael, and in February of 2016, federal agents took Rafael into custody in a raid on his warehouse. (See Mother Jones article.)

In 2017, Rafael received a sentence of four years in prison and partial seizure of his 13-boat fishing fleet and permits for operating a criminal enterprise. The 27 counts of fraud included false labeling, falsifying fish records to evade federal fish quotas, cash smuggling and tax evasion. He was fined $3 million, forced to surrender all assets and was banned from commercial fishing for life.

Rafael was released from prison and community confinement after serving 47 months of his sentence in early March 2021. (See “‘Codfather’ Carlos Rafael officially a free man, according to federal record,” by Anastasia Lennon, South Coast Today.)

As part of a settlement with NOAA, Rafael had to sell his empire, which was estimated to be as large as 25% of New England’s groundfish industry. In 2020, one company acquired a portion of Rafael’s holdings — 12 groundfishing vessels and 27 permits — for $25 million. (See “How Foreign Private Equity Hooked New England’s Fishing Industry,” by Will Sennott, The New Bedford Light, ProPublica, July 6, 2022.)

Rafael’s grand fish fraud schemes landed him on the “five worst criminals in food history” list. Perhaps more important though was how Rafael’s schemes exposed weaknesses in regulation designed to protect fisheries. (See “5 of the worst criminals in food history,” by Jenny Luna, Mother Jones, March 24, 2017.)

A new approach

By the early 2000s, the New England fishing industry needed a new way to look at the old problem of how best to manage fishing grounds and regulate how much fish was brought to market. So, in 2009, the New England Fishery Management Council created “catch shares,” and that, it seemed to many, was the seagoing version of Pandora’s Box. 

Rafael had been building his fleet and conducting fraudulent practices 30 years before catch shares were implemented. However, Rafael’s activities helped shine a light on hidden problems catch shares generated. The lack of agency oversight out at sea and on the New Bedford docks — hampered by porous government regulations and loopholes — created an environment where his unethical and illegal pursuits flourished.

According to World Wildlife Fund, illegal, unreported and unregulated fishing worldwide is a $36.4 billion industry, and up to 30% of global catches are illegal. (See World Wildlife Fund (WWF), Overfishing.) Governments and private citizen groups have devoted many decades to conservation efforts to increase the codfish stocks in the spawning grounds off New England and Newfoundland. As a result of these endeavors, thousands of small and large commercial fishermen and women have lost their livelihoods along the Northeast U.S. seaboard but especially in major fishing ports like Gloucester and New Bedford, Massachusetts. 

Faced with shorter fishing seasons, restricted fishing areas and trawl gear, catch quota, and minimal regulatory oversight, good conservation intentions have created an environment ripe for fraudulent fishing and reporting activities. These illegal actions by a few major players circumvent weak policies and regulations for reporting accurate catch totals required for successful fisheries resource management. 

Catch shares: good idea for some

In 2009, the New England Fishery Management Council approved a plan to allocate shares of the annual catch to groups, or sectors, of fishermen that the council created to rebuild populations of haddock, flounder and other groundfish. Fishermen could either fish an unlimited number of days, but had caps on how much they could catch; or their catch was unrestricted, but they could fish only a certain number of days. (See “New regulations passed for New England fishermen,” Sun Journal, Associated Press.)

While catch-share permits have helped stabilize fish populations and catch rates, they tend to create a sense of private-property ownership. The thinking went like this: If you “own” the rights to a renewable resource in a sector, you’re more likely to take care of it.

But that’s not how it worked out. The larger commercial fishing fleets were awarded bigger catch shares, or sectors, which often forced fishermen in smaller sectors to sell out to them (much like how family farmers have had to sell out to agribusiness giants). (See “Op-Ed: Catch Shares Enable Wealthy Landlords to Gobble Up Local Fisheries,” by Ryan Bradley, Civil Eats, Aug. 31, 2022.) Large catch-share owners would then lease out their quotas to other fishermen (the equivalent of seagoing sharecroppers) at extravagant rates. Catch shares excluded smaller fishermen and prevented new fishermen from the fishery as a wealthy faction accumulated quota and drove up the price.

Fear of consolidation and conglomerates 

The fear was that catch-share consolidation would lead to increased fraud and cheating. U.S. coastal areas on the West Coast with fishery councils using catch shares incorporated percentage caps that prevented consolidation from getting out of hand.

Not so with the New England Fishery Management Council. Such protections weren’t implemented in 2009, and without them, the livelihood of independent fishermen up and down the New England coastline was threatened. 

In other coastal areas, fishing conglomerates leased portions of their catch share to independent fishermen. This sublease process created very wealthy fishing industry moguls whose boats never had to leave the docks. For example, in 2016, the right to catch 77% of the annual red snapper harvest in the Gulf of Mexico was controlled by just 55 people. (See “Kingpins of the Gulf make millions off red snapper harvest without ever going fishing,” by Ben Raines, nola.com, updated July 19, 2019.)

Keeping them honest: Amendment 23

Fast forward to October 2020 when the New England Fishery Management Council adopted Groundfish Amendment 23, a 100% monitoring target to ensure a more accurate account of fish catches. NOAA Fisheries is currently reviewing the proposal for approval and implementation. According to amendment language, it will provide “adjustments to the current groundfish monitoring program to improve the reliability and accountability of catch reporting in the commercial groundfish fishery to ensure there is precise and accurate representation of catch (landings and discards).” [See “Northeast Multispecies (Groundfish) Amendment 23,” New England Fishery Management Council.]

Janice M. Plante, public affairs officer for the council, tells Fraud Magazine that Amendment 23 is almost over the finish line. “We don’t have a final rule yet [on Amendment 23] but are expecting one shortly,” Plante says. “The council started working on improving the catch-reporting system before the Carlos Rafael incident, so the two aren’t correlated, but we’ll definitely have a better system in place with Amendment 23.”

As early as 2005, the Cape Cod Commercial Fishermen’s Alliance out of Gloucester began piloting the use of cameras on boats. As expected from the start, there was a lot of skepticism (and aversion) about the program. The alliance was aware of the perceptions — how it seemed like Big Brother, worries about what the data would be used for or who would have access to it — but they also saw the positives. (See “Electronic monitoring first seen as a pariah, converts more fishermen,” by Dy Doreen Leggett, CapeCodFisherman.org, July 24, 2018.)

Under this amendment, groundfish sector licensees can choose to achieve the target of a 100% at-sea monitoring coverage rate by either taking onboard a human at-sea monitor or using monitored cameras mounted on the vessel to record fishing activity. (See “Groundfish Amendment 23: Council Adopts 100% Monitoring Target; Industry to be Reimbursed if Federal Funds Available,” by Janice Plante, New England Fishery Management Council, Oct. 6, 2020.) 

Foreign private equity takeover of the oceans?

For decades, fishermen have warned regulators, politicians and other decision-makers of the inevitable result of fishing privatization policies, such as sector allocations and catch shares. With foreign investment in the form of private equity owning outsized catch shares for groundfish, the fear is that fishermen are becoming modern-day indentured servants.

Fishermen are working longer hours and bear a larger proportion of vessel maintenance costs. The growing presence of foreign investment and private equity has now caught the attention of Senators Elizabeth Warren, Ed Markey and Richard Blumenthal who are calling for more stringent monitoring, reporting and enforcement of restrictions on foreign ownership in the domestic fishing industry. (See “U.S. Senators Demand Federal Scrutiny of Private Equity’s Incursion into Fishing,” by Will Sennott, The New Bedford Light, ProPublica, July 22, 2022.)

Avoiding a future ‘tragedy of the commons’

As a Gloucester native with family ties in the town going back 150 years, it was natural that my first career out of college would be working for NOAA as a research oceanographer. As a teenager, I apprenticed on a lobster boat out of Gloucester one summer, and I helped an uncle paint the hulls of trawlers in dry dock along the harbor the following summer.

Working on Mr. Souza’s lobster boat was for me a hands-on education in conservation. We never kept an undersized lobster and our wooden lobster traps were the permitted legal size. He taught me that the people in the best position to safeguard natural resources are those who earn their living from them every day, especially those who farm the ocean’s bounty with an eye on future harvests.

Working with my Uncle George painting the hulls of trawlers on the harbor waterfront and hearing his retelling of Gloucester’s history and people who created it helped me to hold fast to its unique 400-year legacy. Those stories brought into focus the dangerous and difficult occupation of commercial fisherman, whose fortune rose and fell on the weather out over The Banks or the Flemish Cap; a vessel’s seaworthiness; the size and presence of schools of fish; and probably more than anything else, federal regulations. 

Well-intentioned fishery policies, regulations and laws are tools that try to avoid the economic condition called the “tragedy of the commons.” Such unintended consequences occur when individuals with access to a scarce, highly competitive public resource (also called a common) act in their own interest (for example illegal fishing and overfishing) and, in doing so, eventually deplete the resource to the detriment of all others. 

Typical solutions to overcoming the tragedy of the commons include imposition of private property rights (catch shares, for example), government regulations or action taken by a group of people (fishermen alliances, for example) whose purpose is to improve their condition and realize a common goal of collective action (boycott, protest, class action legal options). (See “Tragedy of the commons: What it is and 5 examples,” by Alexandra Spiliakos, Harvard Business School Online, Feb. 6, 2019.)

As Mr. Souza taught me many years ago, we must develop a sustainable mindset. Understanding that maintains the integrity and viability of the commons, much the same way building fraud awareness helps maintain the ethical integrity of organizations.

[See sidebar: “‘Unrules’ problem with most government regulations”.]

Donn LeVie Jr., CFE, is a Fraud Magazine staff writer, ACFE mentor, speaker, and leadership positioning/influence strategist and coach. He’s president of Donn LeVie Jr. STRATEGIES, LLC, which conducts corporate programs on leadership influence and offers virtual leadership coaching/mentoring programs for executive leaders and high-performing professionals. Visit his website at www.donnleviejrstrategies.com. Contact him at donn@donnleviejrstrategies.com. 

‘Unrules’ problem with most government regulations

Government regulations come loaded with linguistic ambiguities, unintentional errors, omissions and mistakes. Often the letter of the law appears to contradict its spirit, further confounding understanding and compliance. This creates loopholes, which fraudsters, like Carlos Rafael in the article above, often leverage to their advantage.

Exploiting a regulation loophole is one person’s effective business strategy and another’s gaming of a less-than-perfect system. The writing of government regulations comes with a variety of waivers, carve-outs, dispensations and loopholes known as “unrules.” These built-in ambiguities are the decisions (often the unwritten exceptions to the rules, or “dark rules”) that regulators make to relieve some of the burden of regulatory requirements. Federal regulatory law is permeated with these exemptions that can have far-reaching outcomes for intended populations and how we should think about the actual or perceived weight of those regulations. (See “The government’s hidden superpower: ‘unrules,’” by Cary Coglianese, Gabriel Scheffler and Daniel E. Walters, Fortune, Commentary, Oct. 30, 2020.)

There’s another factor in play with how we deal with types of unrules. By using a loophole, we enter an ethical gray area through what could be called “malicious compliance.” In other words, we try to comply with regulations to avoid breaking the law or any culpability, but in a way that may conflict with what the rule creators had originally intended. In such cases, arguments such as “form versus substance” and “letter versus spirit of the law” are often used to justify these actions. It provides interesting perspective into the thought process of how people navigate the struggle between self-serving motives and compliance with rules and regulations. Arguably though that process is an important part of assuring group cooperation and maintaining the integrity of the commons (shared resources).

Engaging with loopholes — intentional and otherwise — requires a subtle recognition of the interplay among objectives, social ambiguity and value orientation. (See “Loopholes, a Window into Value Alignment and the Learning of Meaning,” by Sophie Bridgers, Laura E. Schulz and Tomer D. Ullman.) Regulation loopholes create an ethical tension between personal gain and the public welfare. Whether the exploitation of a loophole can ever be in the public’s best interest remains a point of contention.