As customs and trade lawyers, we often receive on various occasions such remarks from companies as “we are doing okay as we have encountered no big difficulties with China Customs”. When pressed for reasons, they would explain that that the goods have been cleared with China Customs quite smoothly and there seem no legal problems at all.
The remarks immediately raise a red flag to us: there is a possible implication that China customs-related legal risks may have been accumulated beyond the notice of the legal department or even the management of the company.
- Risks Deferred
The administrative or even smuggling liability risks may arise with a time lag in most cases. As far as multinationals are concerned customs investigations often occurred after (rather than upon) customs clearance of export or import goods. If there is any violation of law in the process of customs declaration, the import or export company will be liable for administrative or even criminal penalties, despite the fact that the customs have accepted its declarations and have the goods released. In this sense, a successful or smooth clearance of goods with the customs does not mean risk-free in a legal sense. The legal risks solely depend on whether the import/export company has complied with China customs laws and regulations in the customs declarations. Should there have been no legal review in advance of what are to be declared to the customs, no compliance certainty could be ensured, and incompliance would often have occurred without notice at the time of customs clearance. Because of the hidden nature of incompliance, the risks are therefore often deferred as they were not explosive right upon declaration to the customs.
- Risk Accumulated
Encouraged by successful clearances, the same pattern of illegal declarations would normally be repeated in practice, for several years in many cases. For each given import or export shipment, the value of the goods and duties may be marginal. However, over the years, the involved goods value and customs duties (and import VAT) will often end up in a huge amount, turning the violations into a big case. The deferred risks thus could accumulate over time.
For those who are not familiar with the customs laws and practice, they tend to assert a defense that since the previous illegal declarations were accepted by the customs, the company should not be liable. Unfortunately, such defense is not valid at law. Customs acceptance of the declarations will not free import or export companies from legal compliance obligations, nor administrative or criminal liabilities. The customs does not have the power to endorse any illegal declarations. Even where certain customs officials did knowingly endorse the illegal declarations, the liabilities arising from the previous customs violations would still haunt the officials and the company as well.
- Risks with Severe Consequences
The company implicated in the administrative violations will be fined, with illegal gain forfeited and ratings with the customs downgraded. As a result, its import and export shipments in future will be subject to intense customs inspection, which will incur more costs and render import and export clearance substantially delayed.
In case of intentional untruthful declaration that results in tax evasion or violation of mandatory trade restraints, the company will be likely exposed to smuggling liabilities. The penalties include fines, forfeiture of smuggled goods and downgrading ratings within the customs clearance system. In case of corporate smuggling crime, the person in the company who knowingly permits or participates in the smuggling will incur personal criminal liabilities, such as imprisonment.
Almost all multinationals charged with smuggling were astonished by the consequences and perhaps by the smuggling activities per se. They have wondered how great companies in the world could in any way possibly engage in smuggling activities in China, and how the smuggling could be attached to their well respected brands. In some cases, serious consequences might not be threatening due to vigorous legal defenses, but might still be creeping if the customs regulatory compliance scheme is not in place; in some other cases, companies were contaminated with a smuggling label, and people were put in jail.
- Risks Highly Explosive
The Anti-smuggling Bureau (“ASB”) within China Customs has been very active in the recent five years. Unlike other tax authorities, ASB has the full power of police to investigate any administrative violations or criminal smuggling cases. When ASB policemen suddenly show up on site in a dawn raid, ASB will not inform you if it is an administrative or criminal case. The company under investigation cannot be 100% certain about the nature of the investigation. However, one thing is certain: ASB police force will not let go any clue manifesting any smuggling intent relevant to certain customs clearance irregularities, whether it has been recorded in an email, meeting minutes or a confession made by employees questioned. the ASB investigation is very likely to become a criminal one if they can find any element of smuggling intent, corporate or individual.
Obviously, the accumulative risks would become explosive in the vigorous ASB investigations. There are many factors, any one of which may trigger the explosion: whistle blowers, customs post-clearance audit, clues transferred from customs’ clearance division to ASB within the same customs authority, red lights on customs’ own risk surveillance system, certain industry being targeted, and so forth.
- How to Tackle the Risks?
The potential explosion of the risks of non-compliance with customs laws will no doubt impair the core interest of multinationals in China. However, such risks are seldom caught the attention of in-house counsels of multinationals. Each time HaoLiWen presents customs-related risks and lessons from ASB investigation cases, we surprised legal counsels who did not realize existence of so many different legal risks relevant to M&A projects, IP licensing royalties, non-trade payments under service level agreements, bonded manufacturing or warehousing operations and business models, import and export customs declarations, treatment of imported equipments under tax-exemption scheme, import goods transfer pricing and so on.
As a result, we have been often invited to conduct training sessions for corporate clients. Invariably each time we presented the risks and lessons, the business people were not only surprised, but scared. This is probably a positive sign for in-house counsels for future compliance purposes. Business people, to protect the company and themselves, would be more willing than before to seek legal advice on the customs-related matters, which in turn, enables legal counsels to identify the legal risks in the custom-related businesses and tackle them in a timely manner. In practice, a legal compliance audit and health check will be more effective to stop certain illegal practices, if any, thus preventing risk accumulation prior to reaching an explosive point.