Tag:compliance and regulatory-customs and trade compliance,consumer and retail
In recent years, the domestic cigar market in China has developed rapidly, with a growing demand for imported cigars among consumers. The tobacco industry has also increasingly emphasized the cigar category. The China National Tobacco Corporation once proposed to "focus on mid-to-high-end cigars as the leading product and low-end cigars as the foundation, providing strong support for the construction of a modern tobacco economic system and promoting high-quality development in the industry". However, alongside the prosperity of the cigar market and the imbalance between supply and demand, smuggling activities have emerged. Particularly in recent years, cigar smuggling has become increasingly rampant. In just the first half of 2024, dozens of cigar smuggling cases have been uncovered in Beijing, Shanghai, Nanjing, Guangzhou, and other cities, with hundreds of thousands of smuggled cigars seized, involving over one hundred million yuan. Cigar smuggling has become a prominent issue. Why have cigars become a major target for smuggling? What are the common methods of smuggling cigars? Should cigars be classified as "goods" or "items"? What issues arise in the resale of smuggled cigars? This article will examine and analyze the legal issues surrounding cigar import smuggling based on recent judicial cases and our practical experience in handling such cases.
I. Current Status of the Chinese Cigar Market and Reasons for Smuggling
1. Domestic Cigars Cannot Meet Consumer Demand
On the one hand, When imported cigars are mentioned, consumers typically think of quality cigar-producing countries like Cuba, the Dominican Republic, and Brazil, as well as top international cigar brands such as "Cohiba", "Davidoff", and "Romeo y Julieta". In contrast, domestic cigars are often less well-known, and there may even be a bias against them. On the other hand, China's domestic cigar industry started relatively late and is still in its infancy. There remains a considerable gap between domestic cigars and internationally renowned brands in terms of quality, craftsmanship, and brand influence, making it difficult to meet domestic consumer demand for the time being.
2. Imbalance Between the Quantity and Variety of Imported Cigars and Consumer Demand
Generally, imported cigars in China are brought in through a formal process: local tobacco companies report demand to the China Tobacco Import and Export Corporation, which then submits an annual import plan to the State Tobacco Monopoly Administration for approval before importing from abroad and distributing them to local tobacco companies. Cigars imported and sold through this formal channel are commonly known as "national-line" cigars. However, it is understood that the number and variety of national-line cigars circulating in the market are relatively limited and cannot meet the vast market demand. Especially in third- and fourth-tier cities, ordinary cigar consumers find it difficult to purchase cigars through formal channels.
3. High Barriers and High Tax Rates Create Profits for Smuggling
Considering consumer demand, the state allows consumers to purchase cigars from abroad by carrying or mailing them, in which case Customs manages the cigars as personal items, imposing certain restrictions on their quantity and value, limited to personal use only. According to relevant regulations, the comprehensive tax rate for cigars imported as general trade is 120.7% (calculated based on the most-favored-nation rate, which applies to most of China’s major cigar-importing countries). Meanwhile, the import tax rate for cigars classified as personal items is 50%. The significant tax rate difference makes the cost of purchasing cigars through overseas shopping considerably lower than buying national-line cigars, thus creating profit margins for smuggling.
Driven by the above three factors, along with consumer demand and economic incentives, some consumers make false declarations to Customs during import to pay less tax and further reduce purchasing costs. Additionally, some unscrupulous individuals smuggle cigars at low prices and sell them at high prices to gain profits, causing significant losses to the national treasury and disrupting the circulation order of the domestic cigar market.
II. Main Methods of Cigar Smuggling in Practice
1. Smuggling Cigars through "Cross-Border Couriers"
"Cross-border couriers" are individuals who frequently travel between the Chinese mainland, Hong Kong SAR, and Macau SAR, carrying goods across borders either to bring them in or take them out. The essence of employing "cross-border couriers" for smuggling is akin to an "ant-moving" method, where cigars are smuggled into the country through non-declaration channels by dividing shipments into smaller quantities and transporting them multiple times. For example, in a cigar smuggling case in Guangdong Province, the organizers distributed the cigars involved in the case to multiple "cross-border couriers", who then smuggled the goods through non-declaration channels at border crossings and handed them over to the defendants.
2. Smuggling through False Declaration via Postal Channels
False declaration smuggling refers to the act of purchasing cigars abroad and, to ensure customs clearance and reduce taxes and fees at the import stage, falsely declaring the goods to Customs by misreporting the product name, undervaluing the price, or falsifying the trade method. All three of these false declaration methods constitute smuggling activities, and in practice, most cases involve a combination of multiple methods.
(1) Misreporting Product Name
The amount of tax payable on imported items is related to the applicable tax rate for the items. The postal tax rate for cigars is 50%. When declaring, individuals usually misreport cigars as items with a lower tax rate, such as "food" or "other goods" with a 10% tax rate, achieving the goal of paying less tax through a 40% tax rate difference. For example, in a cigar smuggling case in Beijing, the individuals involved instructed those sending cigars from abroad to label the packages as "gifts" or "household items" to reduce the applicable tax rate and pay less tax.
(2) Underreporting Price
Individuals underreport the price generally for two reasons. The first is to comply with Customs' value limits on postal items, and the second is to declare a price lower than the actual transaction price to Customs, thereby directly achieving the purpose of paying less tax. For instance, in the case of Cohiba Robusto cigars, which sell for about USD 70 per stick on foreign websites, the individuals involved often declare them at USD 3-5 per stick. In a cigar smuggling case in Guangdong, the defendant continuously lowered the declared price to test the minimum allowable declaration price for cigars by Customs, eventually declaring them at USD 3 per stick.
(3) Falsifying Trade Method
Individuals may falsely declare cigars, which should be imported through general trade channels, as personal postal items, thus reducing the tax rate to lower the taxable amount. They often use methods such as splitting packages or receiving goods under someone else's name to appear compliant with the entry requirements for personal items and evade Customs supervision. For example, in a cigar smuggling case in Fujian, the individual instructed the website staff to split the same batch of goods into multiple packages and send them to various cities in the Chinese mainland, using both their own and others' identities as recipients to evade Customs supervision.
3. Indirect Smuggling
Article 155 of the Criminal Law establishes that subsequent purchasing activities of smuggled goods constitute the crime of smuggling. In practice, individuals engaged in smuggling cigars often seek profit by advertising the sale of these smuggled cigars through social media platforms, online forums, and other channels, leading to the formation of small circles or even the development of a full-fledged supply chain. If a consumer knowingly purchases smuggled cigars from a smuggler and the quantity is substantial, such conduct may be deemed as indirect smuggling. For instance, in a smuggling case in Guangdong Province, a buyer, fully aware that the tobacco sold by the smuggler was illegally imported, continued to purchase large quantities of smuggled tobacco, resulting in the buyer being charged with the crime of smuggling.
III. Analysis of the Classification of Cigars as "Goods" or "Items"
1. On "Personal Use and Reasonable Quantity"
In judicial practice, whether smuggled cigars should be taxed as items or goods is one of the primary points of contention between the prosecution and defense. This is particularly true for cases where cigars are purchased for both personal use and resale. Some argue that the crime amount should be calculated separately for items and goods, while others suggest that even if there is some personal use, if the quantity is large, it should be wholly classified as goods, with the personal use aspect considered a mitigating factor during sentencing. Based on our analysis of previous cases and experience in defending smuggling charges, we believe both viewpoints have merit and that specific situations should be analyzed on a case-by-case basis.
From a linguistic interpretation perspective, the fundamental distinction between goods and items is whether they are for sale, which aligns with the general public's understanding. Legally, Article 64 of the "Customs Administrative Penalties Implementation Regulations" defines items as “luggage and personal belongings carried by individuals or mailed in and out of the country, including currency, gold, and silver. Those exceeding a reasonable quantity for personal use are considered goods". Here, "personal use" refers to items intended for the personal use of the traveler or recipient or as gifts to relatives and friends, not for sale or lease. "Reasonable quantity" refers to a normal quantity determined by customs based on the traveler’s or recipient’s situation, travel purpose, and duration of stay. Additionally, the Customs Law Working Group, in its "Interpretation of the Customs Law of the People's Republic of China", suggests that the determination of whether an item has a commercial nature can help distinguish between "items" and "goods".
Therefore, the criteria for determining whether something is an item or goods primarily depend on whether it has a commercial nature and the understanding of "personal use" and "reasonable quantity". While the provisions regarding "commercial nature" and "personal use" are relatively clear and easy to understand, there is no specific standard for reasonable quantity from customs. In theory, some suggest that customs regulations on the quantity and limits for personal carrying or mailing could be referenced, while in practice, customs officers have broad discretion in enforcement based on the principles of fairness and reasonableness.
We believe that in practice, when determining whether something is an "item" or "goods", particularly in criminal cases, the primary criterion should be whether it has a commercial nature, with whether it meets the "reasonable quantity" requirement as a secondary consideration. Specifically, the first step is to determine whether the cigars purchased were for "personal use" or "resale", i.e., whether the cigars have a commercial nature. If there is evidence that the individual purchased cigars for personal use or resale, they should be classified as items or goods accordingly. Secondly, if the evidence does not sufficiently prove the purpose of the cigar purchase, the "reasonable quantity" standard can be used as an auxiliary criterion. If the quantity far exceeds what is considered reasonable and the individual cannot provide a reasonable explanation, it can generally be considered goods; if it only slightly exceeds the reasonable quantity, or if a reasonable explanation can be provided based on the individual's actual use, it should be classified as items under the principle of doubt benefiting the defendant.
This perspective is also supported by some case precedents. For instance, in a cigar smuggling case in Guangdong Province, all the cigars smuggled by the defendant were for personal use, and the court found the defendant guilty of smuggling ordinary items. In a smuggling case in Shanghai, the defendant provided evidence that some cigars were for personal use and some for sale, and the court calculated the crime based on both items and goods. In a smuggling case in Beijing, the defendant argued that the cigars were for personal use but failed to provide evidence. The court ruled that the quantity of cigars smuggled within a short period far exceeded what could be used personally, convicting the defendant of smuggling goods.
2. On "Indivisible Item"
According to Customs General Administration Announcement No. 43 of 2010, if personal items mailed in and out of the country exceed the specified value limit, they should be returned or cleared through customs as goods. However, if the package contains only one indivisible item and exceeds the value limit, it may still be cleared as a personal item after customs inspection confirms it is for personal use.
Customs regulations do not provide a detailed definition of "indivisible", but according to the Civil Code regarding the division of shared property and related legal principles, "indivisible" can be understood as a single, independently packaged entity that is difficult to divide or whose value would be diminished if divided. Specifically, in the case of cigars, a box of cigars could be considered an "indivisible item". At the declaration stage, if an individual’s package contains multiple boxes of cigars that exceed the stipulated limit, customs generally requires their return. If the individual evades customs control through false declaration at the declaration stage and successfully brings the items into the country, there are differing views on whether the items should be considered goods or items during subsequent accountability. No clear opinion has been found in existing court judgments. We believe that Customs General Administration Announcement No. 43 of 2010 only stipulates “handling clearance procedures as goods” and does not deny the item’s classification as goods or items. Therefore, when a package exceeds the value limit and contains multiple items, whether they are classified as items or goods should still fundamentally depend on whether they have a commercial nature.
IV. Analysis of the Resale of Smuggled Cigars
1. The Crime of Smuggling Goods and the Crime of Illegal Business Operations
According to Article 2 of the Supreme People's Court and the Supreme People's Procuratorate's "Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Illegal Production and Sale of Tobacco Monopoly Products", illegal operation of tobacco monopoly products without the proper permits constitutes the crime of illegal business operations. Thus, if a person smuggles cigars into the country and then engages in resales, this behavior may simultaneously constitute the crime of smuggling goods and the crime of illegal business operations. Since the purpose of smuggling cigars is to profit from their resale, it could be argued that the smuggling and sales actions are intrinsically linked, with the smuggling being the means and the sales being the end, warranting a penalty for the more serious crime under the principle of crime concurrence. In practice, many cases have adopted this judicial approach. For instance, in a smuggling tobacco case in Shandong, the defendant smuggled tobacco into the country and illegally resold it without obtaining a tobacco monopoly retail license, thus constituting both the crime of smuggling ordinary goods and the crime of illegal business operations. The court ruled it as a concurrence of offenses and imposed a penalty for the more serious crime. However, there are also cases where multiple offenses are penalized for post-smuggling sales, such as a smuggling case in Lianyungang where the defendant repeatedly purchased smuggled tobacco despite knowing it was contraband, and then resold it. The court deemed the defendant's purchase behavior as constituting indirect smuggling and the resale behavior as constituting illegal business operations, resulting in multiple penalties. We believe the outcome of this ruling is open to debate.
2. The Crime of Smuggling Goods and the Crime of Money Laundering
Smuggling is a predicate offense for money laundering. The behavior of selling smuggled cigars could constitute the crime of self-laundering. On this issue, one perspective holds that sales are a natural extension of the smuggling crime, with a close relationship or absorption relationship between the two, and therefore the downstream crime of money laundering should not be separately recognized. Another perspective argues that, based on the legislative intent of the anti-money laundering laws and the need to prevent upstream crimes, the crimes should be punished cumulatively. We are inclined to agree with the first perspective.
If we only examine the act of selling smuggled cigars, the defendant, in essence, did achieve the effect of concealing or disguising the proceeds of the smuggling crime through the sale. However, considering the relationship between smuggling and sales, the act of "selling" is inherently a component of the crime of smuggling ordinary "goods" and should not be evaluated twice. Moreover, although the sale objectively has the effect of concealing or disguising criminal proceeds, the subjective purpose is not to conceal or disguise, but rather to achieve economic gains, which does not warrant separate penalization. Therefore, the act of selling smuggled cigars should be judged as a single crime of smuggling, and judicial practice typically sentences the offender solely for the crime of smuggling ordinary goods. Accordingly, if a buyer knowingly purchases smuggled cigars from the smuggler, their purchase constitutes both indirect smuggling and money laundering, and the more severe offense should be punished under the principle of imaginary concurrence of crimes.
There are also cases where the smuggler hands over the smuggled cigars to others for resales. In this scenario, whether the smuggler conspired with others in the smuggling should be distinguished. If there is evidence of conspiracy, those involved can be regarded as co-offenders in smuggling, with only one crime of smuggling ordinary goods determined. Such organized smuggling gangs are also relatively common in practice. However, if there is evidence that the seller did not conspire in the smuggling but knowingly assisted in selling smuggled goods, they could be charged with money laundering.
V. Summary and Suggestions
For cigar consumers, purchasing foreign cigars out of pursuit of a higher quality of life and diversified cigar options is understandable. However, complying with existing laws, purchasing through legal channels, and truthfully declaring to customs is an obligation every citizen must fulfill. Falsely declaring to customs, evading supervision, purchasing smuggled cigars, or using them as a tool for profiteering through resales could result in administrative penalties or, in more severe cases, criminal prosecution.
For relevant law enforcement and judicial authorities, on the one hand, they should recognize the legitimate demand of consumers and the current supply-demand imbalance in the cigar market. Behaviors involving personal use or gifting should be corrected and guided through administrative means as much as possible, providing opportunities for correction. On the other hand, those engaging in smuggling for profit, especially organized smuggling groups, should be severely punished to ensure public health and safety and maintain stable economic and social development.
Additionally, relevant policies should be adjusted to adapt to social and economic development and better meet public needs. First, promoting domestic cigar production to create high-quality, high-value domestic cigars should be a priority. Second, increasing the variety and quantity of imported cigars would provide domestic consumers with more options and purchasing channels. Third, policies related to cigar imports should be reasonably improved, such as adding cigars to the cross-border e-commerce import product list and Hainan offshore duty-free list, and appropriately reducing cigar tariffs.
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