The gray-hulled ship, decks stacked high with hundreds of cargo containers, resembles less an ocean vessel that a seagoing freight train – its manifest listing products from coffee and chemicals to wine and furniture.

But the Liberian-registered freighter last called upon the port of Buena Ventura on Colombia’s west coast, not far from the cocaine suppliers of Cali.  As Larry Raffaele, a veteran U.S. Customs Service inspector, stands on the dock and watches the sealed cargo containers pulled off one by one, he sees only hiding places.

Millions of tons of cargo are moved in and out of seaports such as Port Newark-Elizabeth – cars from Japan, orange juice from Brazil, coffee from Colombia and running shoes from Malaysia.

• An increasing amount of illicit cargo is turning up in the nation’s ports, evidenced by rising numbers of seizures by the U.S. Customs Service – ranging from stolen cars and drug money being exported, to imports of drugs.  Authorities concede, however, they are catching only a fraction of what’s coming though.

• Smuggling is becoming more sophisticated.  One ongoing scam at Port Newark uses Phantom exports and phony bills of lading to smuggle American Products earmarked for overseas distribution back in this country.  The scheme in some cases is being used to launder dirty money.

• Sloppy enforcement of food import laws at entry ports has put the public at risk, allowing a substantial amount of tainted food imports – food found to be unfit for human consumption, some of it contaminated by dangerous E. coli bacteria – to be slipped past port inspectors and onto store shelves.

The deal was for coffee.

A humanitarian group calling itself the Sina Foundation has negotiated a heavily discounted, $15.8 million purchase of Taster’s Choice instant Coffee.  It said it was going to distribute it to the needy in Egypt in support of the government’s fight against Islamic extremists.  The order was so large that lines of trucks wound around the warehouse in Jersey City to pick up the coffee shipment.

It was all an elaborate export scam.

The coffee – which was sold for less that the U.S. wholesale price – ended up on supermarket shelves in this country, earning a tidy profit for a Bergen County food broker and a Swiss freight forwarder – who were later convicted of fraud.

Law enforcement officials and trade experts say Port Newark-Elizabeth us a focal point for such cargo schemes, which they say spawned a new crime – providing paper trailed for dirty money.

“This is the new frontier for money laundering,” said Todd Sheffer, director of the National Associated of Credit Management’s loss prevention department, which tracks businesses that engage in credit fraud.

Money laundering generally employs multiple transactions to disguise the source of the original funds, until they appear to be legitimate profits from legal businesses.  The movement typically allows a drug trafficker or a mob boss to spend the money without having to answer uncomfortable questions about where it came from.

However, increasing scrutiny on banking institutions and world financial markets has made it more difficult to hide such transactions, and U.S. State Department officials say money launderers now are turning instead to the purchase and sale of consumer goods, luxury items and other products involved in the import-export trade to provide a pedigree for dirty money.

“All these facilities utilize a variety of vehicles to mask the origin and ownership of tainted funds,” noted a recent State Department report, citing the use of shell companies as a common vehicle.

Phony export deals have been an ongoing problem for the U.S. manufacturers for years.

The schemes, known as cargo diversion make money by undercutting the U.S. wholesale price of American manufacturers.

Here’s how it usually works:

A legitimate U.S. company receives an order from an overseas buyer in a part of the world that may represent a new market for the American company.  The company offers the goods at a price below the U.S. wholesale price – but on the condition that they will not be sold in this country.

The company fills the order and ships it though a place like Port Newark.  However, the overseas buyer is actually a front for someone intending to divert the foreign shipment back to the U.S.

If the diverter is handling the shipping, he may not even load the cargo aboard a ship.  Instead, the merchandise finds its way directly to discount outlets and wholesalers in the United States and the manufacturer receives a fake bill of lading.

Other times, the diverter will actually ship the product out of Port Newark to an intermediate port like Cologne, Antwerp, Singapore or Roterdam.  But on arrival, the merchandise is simply turned around and sent back to Port Newark.  There, the goods are declared, “U.S. goods returned” though U.S. Customs, which scarcely looks at the shipment, and they are sold to discount chains nationwide.

By itself, there is nothing illegal about cargo diversion, although it infuriates manufactures because it undermines their pricing and marketing strategies.  A number of legitimate gray market companies specialize in acquiring products outside normal distribution channels to feed the demands of consumers looking for cheap name-brand electronics, cosmetics and even food.

Assistant U.S. Attorney Noel Hillman specializes in prosecuting cases when the gray market diversion involves fraudulent export incentives or other crimes.

“These transactions put consumers at risk, hurt the U.S. Treasury, and can be used as a mask for the international movement of funds as part of another scheme, including money laundering,” he said.

Hillman said Port Newark-Elizabeth is a major center for gray market activity.  “The area can be a black hole that a diverter needs to operate,” he said.  “It is the largest East Coast port and there are large-capacity warehouses here to neutralize the goods.  You have a lot of independent shipping and trucking companies that will cooperate and you have freight forwarders who may be willing to sell false paperwork.”

It is a scenario well suited to money laundering, said Sheffer.  He noted that law enforcement agencies would question a multimillion-dollar wire transfer to a foreign bank, but no one would take a second look at a letter of credit used to purchase U.S. consumer goods.

“It’s a much better way to avoid the attention on law enforcement,” Sheffer said.

Donald deKieffer, an international trade lawyer based in Washington, D.C., has found nearly 50 front companies connected with various diversion transactions in republics of the former Soviet Union, the focus of a growing world-wide investigation into money laundering and illegal cash transfers involving U.S. banks.

According to deKieffer, such transactions are growing because they represent an easy way to take money out of countries that restrict the flow of capital.

“Let’s say you have millions of rubles in Moscow,” he explained. “But you don’t want rubles in Moscow.  You want dollars in Geneva.”

A criminal might not be able to go to the Central Bank in Moscow to exchange those rubles, but it is relatively easy to obtain a letter of credit from a bank to purchase detergent in the United States for export, he said.

Paid for with the letter of credit, the soap never makes it to Russia. Instead, it is sold to discount marketers in the United States and the proceeds end up in a Swiss bank account.  The multiple transactions leave a legitimate paper trail that may avoid the attention of agencies like the Financial Crimes Enforcement Network, which sifts for clues pointing to money laundering.

The individuals who handle the transaction are usually not even the ones with the dirty money, he said, but only the “faces” used by others trying to launder their funds through third parties.

“This is cool for bad guys,” said deKieffer, who served as general counsel to the U.S. Trade Representative and now represents manufacturers that file suit when their products are diverted.

“Usually they pay a discount to launder cash.  Now they are laundering it though an American soap company, and making a profit on it,” he remarked.

Federal prosecutors have not made a case in court tying diversion to money laundering.  To do so, they say, would require them to prove that funding for the fake export scheme itself came from illegal activity.  However, Michael G. Kessler, a New York based investigator who handles diversion cases, said there is ample evidence for it.

“Diversion lends itself to laundering dirty case,” said Kessler.

In an ongoing probe he is handling involving contact lenses and solution, he said the source of funds to purchase the products could not be identified.  Payments would arrive as cashiers’ checks and international money orders.

Hillman said that, money laundering concerns aside; diversion poses a threat to the safety of consumers.  “Diverters are notorious for the improper storing, handling and repackaging of diverted goods and are known to use it as a mask for counterfeit and repackaged, outdated items,” he commented.

Some of the cases have involved very elaborate schemes to convince U.S. companies that the export orders were legitimate, including the Taster’s Choice coffee deal, which was so large that even Nestlé got suspicious of the volume.

Hillman still has a jar of coffee from the case and put in out on the table.  “Notice anything different about it?” he asked.

The red label was missing the UPC bar code that all products sold in this country carry, so that supermarket scammers can ring them up.  And when the glass jars of Taster’s Choice started showing up in supermarkets, and Nestlé started getting calls from angry store managers, the company knew it had a problem.

The same group that put together the coffee deal also approached Johnson & Johnson, this time purporting to be the Anglo-American Foundation, and sought to buy diabetic test strips at a discount.  The pharmaceutical products were to be distributed to needy diabetics in the former Soviet Union.

The New Jersey-based drug company filled the humanitarian order, but included consumer coupons in the packages to see where they actually ended up.  Many of the coupons came back from consumers in the New York metropolitan area.

Wayne Gilbert, a former FBI agent and director of security for Johnson & Johnson, said most consumer product companies have diversion problems of some kind.

“We’re constantly seeing stuff coming back into the U.S. as American goods returned,” he said.  “It’s frustrating because there’s not a lot of controls.”

In testimony before a Senate subcommittee this summer looking into the so-called “black market peso exchange” in Colombia, an unidentified witness said Johnson & Johnson was among a number of companies whose products were being used to launder drug proceeds in a series of legitimate-appearing commercial transactions.

Gilbert said it might be happening, but it was beyond the control of any American company.

“Once you sell a product to customer, it becomes their property,” he said. “It’s unfortunate our products are being used, but you tell me how to stop it.”