The importer, a front man for the Calabrian mafia, tells the Chinese seller, who speaks fluent Italian and lives in Rome, that he wants to fix a lower price on the next shipment.

Their business is not drugs or weapons, but Chinese T-shirts, jeans and shoes. The buyer for the mob in Italy's impoverished south wants to declare a falsely low price to reduce the customs duties he must pay because, as he says in a wiretap, "it goes to the state".

This police recording offers a glimpse of the criminal underbelly of trade between the European Union and China, whose mind-boggling size - worth well over 1 billion euros a day - makes it fiendishly hard to police. Making matters worse, the EU is a single market of 300 million people but which has 28 national customs authorities with differing priorities.

Italy, a high-fashion Mecca and home to a culture obsessed with elegant appearances, was the top EU importer of low-cost Chinese clothing a decade ago, before Italian customs agents cracked down on the illicit practice of undervaluation.

Criminal groups trying to evade tariffs by lying about the real value of clothing sold in the EU, China's biggest export destination, had singled out the southern Italian port of Naples as their entry point. There they were declaring pairs of jeans for as little as a euro each and T-shirts for 50 cents.

"The profit margins are high, the volumes are huge and the laws are lax," said Rocco Burdo, the top intelligence officer at the Italian customs agency's anti-fraud unit.

"Undervaluation is a grave threat to all of Europe, and so EU integration should be accelerated to make a unified fight against fraud across the region," he told Reuters at his office's headquarters on the outskirts of Rome.

After the crackdown led by Burdo, the savvy dealers simply re-routed goods through other EU ports such as Hamburg. Italy dropped to number six as importer of Chinese clothing in the region, but it became the top collector of textiles duties, customs data show.

National authorities collect customs duties, which vary but amount to 12 percent of the value of a pair of denim jeans or cotton T-shirts made in China, but hand three-quarters of the revenue to the EU's central budget.

Europe has become a bonanza for trade gangs which exploit the free movement of goods within the EU by importing where there are fewest controls.

The increasingly sophisticated practice of undervaluation costs taxpayers billions in lost duties, and it is often accompanied by counterfeiting and value-added tax (VAT) evasion.

Undervaluation accounts for only a small fraction of overall customs fraud, and European officials stress that criminal gangs, not the Chinese government or state-owned companies, perpetrate this type of fraud.

Nevertheless, it illustrates broader trends in an often difficult trade relationship, where China's aggressive business strategy has brought on more than 50 EU trade defense measures for unfair practices.

Duty-dodging is made easier by the Chinese strategy of controlling both production and distribution to maximize profit. Diverging opinions between EU countries on trade disputes, such as in a recent row over Chinese-made solar panels, also reflect an inconsistent approach to fighting undervaluation.

BOTTOM END

In Europe, this kind of fraud is conducted mostly by small companies headed by Chinese nationals living in Europe in collaboration with local companies which operate below the radar, the EU's anti-fraud investigative body OLAF said.

"Valuation fraud mainly involves criminal organizations. It's the bottom end of the market, and outside the normal commercial circuits," David Murphy, head of the trade customs fraud unit at OLAF, told Reuters.

"For a fraud investigation agency, it's very difficult to get to grips with it. When you do engage with it, it either melts away or moves somewhere else."

OLAF is currently investigating six undervaluation cases, some already known to involve Chinese nationals, but most cases are tackled by local authorities.

China is the world's biggest exporter, with EU imports from there worth 289.7 billion euros ($380.6 billion) last year, Eurostat data show. Total EU-China trade hit 433.6 billion.

EU imports of Chinese shoes and textiles, which are the goods targeted by criminal groups practising undervaluation fraud, were worth 36.4 billion euros in 2012.

Though many of the world's most popular brands sell clothing made in China, the fraudsters who practise undervaluation mainly supply a more informal retail market.

In Rome's growing Chinatown, there are as many as 10 clothing or shoe shops per city block, selling jeans for 20 euros, T-shirts for 10 and shoes for as little as 15.

But it is in open-air markets across the capital where Chinese dresses, jeans, shirts, underwear and shoes are sold at a frantic rate everyday, and it is through these kind of flea markets, common all over Europe, that the criminal groups make their biggest profits.

Also common in the open-air markets is the sale of counterfeit brand-name clothing at heavy discounts compared with the real thing, like rip-off Converse Chuck Taylor basketball sneakers for 20 euros.

Investigators say counterfeiting often accompanies valuation fraud to boost margins further, and in 2011 three quarters of all fake goods seized at European borders came from China.

"I was surprised at the volumes that you can shift through these markets," OLAF's Murphy said. "Initially I thought of it as kind of a minor problem, but in fact vast volumes go through there and vast profits are generated as well."

There are no official estimates on how much EU taxpayers lose to overall customs fraud or to valuation fraud, but an investigation coordinated by OLAF offers some insight.

In conjunction with investigators in several EU states, OLAF dismantled two major Chinese organized crime groups operating out of Austria, Italy and Hungary in 2008 and 2009. Total losses in duties alone were put at 100 million euros, while VAT losses from national budgets amounted to 200 million euros.

As with counterfeiting, VAT avoidance is a common byproduct of valuation fraud. After paying falsely low customs duties at the port of entry, such as Hamburg in Germany, VAT payment is deferred to a country of final destination within the EU that maybe has no sea port, such as the Czech Republic or Austria, and the VAT is never paid, said Murphy.

Five Austrian forwarding agents acted on behalf of Chinese clients to shuttle clothing through customs, handing it over afterward to a network of Chinese distributors and retailers in several European countries.

When the Chinese company running the scam in Vienna was raided by authorities, they found sophisticated equipment used to copy and print false invoices, transport documents and certificates of origin, OLAF said.

"We're talking about billions overall," Murphy said, referring to customs fraud in general. "In my experience, I would say it's much higher than it's estimated."

Italy offers an indicative number. The state collected 3.7 billion euros more in customs duties in the decade that followed its campaign against the fraud compared with what it collected in 2003, before the squeeze, even though volumes decreased.

EU FRAGMENTATION

After Italy, for many years Germany was the top importer of Chinese clothing, though it was never more than the third-biggest collector of duties on garments, data show.

Many of the same companies that were caught practising valuation fraud in Naples moved to Hamburg, Burdo said, citing investigations carried out by his office and prosecutors.

Now Britain is emerging as the main importer of Chinese textiles, though it is no more than the fifth-biggest collector of duties on the goods.

Some countries have taken time to wake up to the fraud and use computer systems to spot irregularities in customs declarations, letting the gangs off the hook. "As each country became aware of the problem and applied risk parameters in their automated declaration system, then the operators would move elsewhere. They are very, very mobile," Murphy said.

Italy's Burdo and OLAF's Murphy say the EU could do more. "Europe, when taken together, is a significant player in the world economy and in world trade, but the EU countries do not play as a team, and this shows in trade with China," Thomas Rosenthal, an economist who heads the research department at the Italy-China Foundation in Milan, told Reuters.

Customs fraud, and undervaluation in particular, is made easier because each country has its own customs agency, and because some countries are wary of imposing any kind of trade restrictions while others value them.

For instance Italy, the EU's second-biggest manufacturer whose goods often compete with Chinese imports, favors curbs while Germany, the biggest and a major exporter to China, appears reluctant to confront an important client.

The EU needs to overcome such national interests. "There should be a further stimulus to political union to become a real global player," Rosenthal said.

In Italy's street markets, most of the Chinese clothing has been brought by truck from the ports of Rotterdam or Hamburg, where it entered the EU, Burdo said. "If there was a single customs service it might function better," OLAF's Murphy said.