Allocation of owner liability in smuggling cases

By Jenny Zhan, Dentons
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smuggling is one of the most common types of crime in international trade. As the owner of the goods is superficially the main beneficiary in this form of crime, he/she will usually be deemed the principal offender. Both the party involved in the case and his/her lawyer will psychologically accept this designation as principal offender. Very few people focus on the commercial arrangements lying behind a smuggling crime case, or the effect of the distribution of commercial benefits on the allocation of the liability of the various entities involved.

Smuggling
Jenny Zhan
Dentons
Partner

Taking a tax farming smuggling case as an example. Solicited by B (a natural person), company A, by way of a tax farming arrangement, entrusted B to handle the entire import process. The parties specified that company A would not engage in customs clearance, and B would provide door-to-door service to company A, but would not provide invoices, including import-stage tax invoices.

As its deductible items were few and its import VAT was rarely used to deduct domestic taxes, company A found after assessment that, by using a tax farming arrangement to import the goods, the expenses payable to B would be several percentage points less than handling import by itself. Company A had some idea of how B profited, but, given the co-operative relationship with B, did not pursue the matter further.

After some time, B’s doings came to light. Following investigations by anti-smuggling police, it was ascertained that B, in concert with others, employed fraudulent entrepôt trade to import the goods, evading the entire amount of import-stage taxes by returning fake goods abroad after replacing the goods. The amount of tax evasion related to company A exceeded RMB50 million.

As company A was the owner of the goods, its legal representative and main persons responsible were promptly arrested. Following an anti-smuggling investigation, it was found that company A had its own import business and was aware of normal import costs, but the amount it paid to B was clearly insufficient for the normal import taxes. Pursuant to the definition of “well aware” in the context of a subjective intent to smuggle provided in the Opinions of the Supreme People’s Court, the Supreme People’s Procuratorate and the General Administration of Customs on Several Issues Concerning the Application of the Law in the Handling of Criminal Smuggling Cases, company A met the definition of “well aware”. It seems unarguable that company A was the principal offender.

The author argues that identifying company A as the principal offender in the smuggling crime runs counter to the principle of the unity of criminal liability and punishment in criminal jurisprudence. In practice, an enterprise in such an unfavourable position may plead its case from the following perspectives.

Company awareness

The crime in this case was committed by an organized smuggling syndicate. Although company A was the owner of the goods, it was neither a member of it, nor aware of the smuggling acts. In other words, company A neither committed the act of circumventing customs oversight, nor instigated others to do so, but only had an idea about how B may have profited (in other words, an inkling of a possible crime).

Finding on this basis that company A had a general criminal intent, and naming it as the principal offender, are not grounded. In general, the entities usually involved in the import stage in international trade include the domestic buyer and its agent, the logistics company and the customs broker. Any of these entities can become the principal offender in a smuggling crime.

Accordingly, an entity should not be mechanically deemed as a statutory accessory based superficially on its function. The author regularly sees cases where the involvement of certain owners of goods originates in the active solicitation by other entities, some of which take charge and offer a one-stop service. Their undertakings and acts make the entire import stage seem completely unconnected with the owner of the goods, giving the owner of the goods the mistaken impression that he/she was completely divorced from any import-stage liability.

However, once the thing blows up, these entities will get away with a slap on the wrist, or even scot-free, because they are not the owner of the goods and they had set up various murky arrangements in advance. Therefore, clear expression by the owner of the goods about the source and time node of the case information will help investigation authorities understand the role of all parties in the whole case.

Benefits distribution

Although company A benefited from smuggling, the benefit derived by it should be objectively assessed to see whether it constituted the benefit normally derived from commercial acts. In tax-related smuggling cases, the conclusion of the findings commonly seen by the author comes in the form: “The smuggled goods in question evaded taxes totalling X.”

Following this logic, where the owner of the goods naturally benefits most from the evaded taxes, little can be said against designating it as the principal offender. However, few people note the distribution of the benefits in the commercial arrangements lying behind a smuggling crime. For example, the deductions from import VAT almost never figure in judicial assessment, but they genuinely count as a benefit, and can sometimes be the key profit point in transactions.

A judicial assessment made while ignoring this point hardly seems fair. Taking our case as an example, company A owned the goods, but did not make the declaration, so the import-stage taxes naturally did not go to it. The party that grabbed the deductions to receive the refunded taxes was the beneficiary.

In our case, the parties had specified that B would not provide any invoices in their commercial arrangement, which signifies that company A gave up the benefit constituted of the deducted portion of import VAT. In other words, its costs for acquiring the imported goods were increased by the portion to which it was entitled for the deductions from import VAT.

Accordingly, when assessing whether the amount paid by company A was markedly less than the normal import expenses, such assessment is clearly incorrect for company A if the deductions from import VAT are ignored. Therefore, a timely explanation from the owner of the goods about its reasonable commercial cost planning may help the investigation authorities identify the true illegal beneficiary and its motive for committing the crime, and thus make a relatively fair judgment.

Jenny Zhan is a partner at Dentons

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