24 August 2017

Smuggling: The Significant Legal Risks Confronting Cross-Border E-Commerce

This article was written by Customs& Trade Compliance team

According to the China Cross-Border E-Commerce Development Almanac (2017), in 2016, the total volume of cross-border export and import online retail reached RMB 54.343 billion. This figure represents an increase of 42.44% on a year-on-year basis. The total import tax in 2017 reached RMB 2.62 billion, increased by 545.11% when compared to 2016. Cross-border e-commerce has grown increasingly popular in recent years as a distinct model from traditional modes of business operation. As a result of this, administrative oversight on cross-border e-commerce (including finance, commerce, customs, customs inspection, foreign exchange, tax, etc.) is also undergoing a process of change. In this process, there has emerged much controversy over the legal nature of and liability related to cross-border e-commerce.

In a case involving the smuggling of ordinary goods or property in the Intermediate People's Court of Guangzhou City ([2015]Hui Zhong Fa Xing Er Chu Zi No. 106), the defendant (Mr Chen) placed bids for foreign wines through a cross-border e-commerce platform on a well-known Japanese website. The prosecution accused the defendant of the false declaration of product name and price in order to evade duties. The duty payable was in the amount of RMB 983,761.7. Dr Chen’s counsel argued that the Japanese website had played a principal role in smuggling foreign wines jointly with Chen. This line of argument was advanced so that Mr Chen would be downgraded to an accessory offender (with the principal offender being the online platform). The court reasoned around the above issue by remaining silent as to whether a cross-border e-commerce service provider’s services may constitute a smuggling offense.

There is therefore a large degree of uncertainty regarding this newly developed mode of business operation, which is constantly discussed by theorists and practitioners. This article will firstly introduce the definition and import trade modes of cross-border e-commerce. What follows is a legal analysis on the possibilities of suspected smuggling of cross-border e-commerce service providers under different cross-border e-commerce business models. We intend to provide some comments on the compliance of cross-border e-commerce, its daily operations and how to avoid litigation risks.

What is Cross-Border E-Commerce?

E-commerce refers to electronic commercial activities. All commercial activities such as deal inquiries, negotiations, conclusion and performance of contracts, etc., that use internet and other electronic means of communication can be regarded as e-commerce. According to the draft version of the Chinese legislation on e-commerce refers to import and export activities of goods or services by means of Internet.

The reason why cross-border e-commerce has experienced dramatic development in recent years is that it breaks through the traditional B2B (Business in country A to Business in country B) model. It establishes new cross-border models of B2C (Business in country A to Consumer in country B) and even C2C (Consumer in country A to Consumer in country B).

In response to the rise of the B2C model, China has launched a series of preferential policies to support as well as regulate it. According to the Notice on the Tax Policies on Cross-Border E-Commerce Retail Imports (No.18 [2016] of the Ministry of Finance), the “Cross-Border E-commerce Taxes ” shall be levied on imported goods that are included in the List of the Imported Commodities in Cross-Border E-Commerce Retail. The e-commerce transaction and logistics platforms (such as express delivery and postal services) are networked with China border customs to consolidate transaction, payment and logistics information in the form of three key documents (Declaration Forms, Payment Lists and Logistics Waybills). For “Cross-Border E-commerce Taxes”, the applicable tariff rate shall be temporarily set as 0% and the import VAT and consumption tax payable shall be temporarily set as 70% of the statutory tax amounts payable. For example, given that the VAT rate is generally 17%, the import VAT payable shall be 11.9%. The same rule applies to the consumption tax. When it comes to personal articles that are not imported through cross-border e-commerce, and retail import goods that cannot provide electronic information in the form of the above three documents, a personal tax will be levied. This personal tax combines customs duties, VAT and consumption tax. The rate of personal tax is levied on different levels, they can be either 15%, 30% or 60%, in accordance with the Chinese government’s taxation policy for cross border e-commerce. There is a tax exemption amount of RMB 50.

Import Business Models of Cross-Border E-Commerce

A. Overseas Daigou

Overseas Daigou, also called Haidai, refers to the third party purchasing of specific goods overseas by consumers in China. This authorized purchasing service may be provided by either the consumer’s acquaintance or professional Daigou merchants. The goods are usually carried by individuals or mailed to China. Daigou businesses run by individuals may later evolve into professional Daigou websites, which in turn then provide comprehensive and streamlined overseas purchasing services to consumers. Due to the lack of transparency in the purchasing process of Daigou websites and their reluctance to provide receipts for overseas purchases, consumers have little knowledge about the information flows, fund flows and the logistics of the goods they have authorized others to purchase. Nevertheless, given the huge price difference between goods purchased through Daigou service and those in domestic stores, Daigou service remains highly popular in China.

B. Direct Purchase Import (B2C)

Overseas direct purchase is also known as overseas direct delivery. It refers to when domestic consumers place orders and pay the personal postal articles tax either by themselves or logistics companies on an e-commerce platform. Sellers abroad then send the goods as parcels or couriers into the destination country. Sellers’ warehouses overseas proceed to prepare and collect the goods, after which they will be delivered to customers in China by means of international postage by logistics transit companies or air fright.

C. Bonded Import (B2B2C)

Bonded import refers to the mode which either cross-border e-commerce service providers or logistics companies send goods into areas under special customs supervision or supervised bonded places, making it possible to promptly deliver specific goods to consumers once orders are placed. During this process, areas under special customs supervision provide a green channel to facilitate customs clearance of these items. Goods into and out of the special customs supervision area is under strict supervision and control of the Chinese customs, which makes the process relatively transparent. Under the bonded import mode, incoming goods are supervised and controlled by both the Customs and the Quality Supervision, Inspection and Quarantine Bureaus. The declared duty-paid value is the commodity’s price set by the cross-border e-commerce platform.

legal-compliance-risks-that-e-commerce-should-pay-attention

Analysis of Smuggling Crimes of Cross-Border E-Commerce Service under Different Trade Models

Model A: As A Third-Party Platform

Cross-border e-commerce services that function solely as a third-party platform provide intermediary service to business and customers. Under this business model, product information such as price and the product description displayed on e-commerce websites are provided by their sellers, and products are also sold by the sellers. In such cases, the legal relationship between the cross-border e-commerce platform and the seller is therefore closely connected. In brokerage activities, the broker does not facilitate between the client and a third person. Rather, they provide intermediary services according to the intermediation contract. The broker neither acts as the agent of the client or the third person.

Proving the intention of cross-border e-commerce service providers’ with respect to smuggling is difficult. Customers are responsible for payment of taxes during customs clearance. As such, the duties payable on imported goods do not constitute part of e-commerce platforms’ operation cost. Furthermore, there is no inventive for e-commerce services providers to evade taxes. Regarding the physical element, e-commerce platforms have no obligation in Customs declaration. This is because they are not be directly engaged in Customs clearance activities. This makes it less possible for e-commerce platforms to directly commit smuggling crimes.

On the other hand, people who conduct Haitao and overseas Daigou through cross-border e-commerce platforms are more likely to be directly involved in smuggling crimes. This can occur in two ways. First, Haitao activities involving purchases of contraband products constitute smuggling crimes. Second, overseas Daigou service providers who carry excessive goods may be accused of smuggling. For example in July 2014, an individual purchased 24 imitation guns through an e-commerce website from an overseas seller. To evade customs, the seller hid the imitation guns inside water dispensers while simultaneously leaving the Customs declaration to an import and export company. The guns were discovered by the Shishi Customs Anti-Smuggling Sub-Bureau. 21 out of 24 of the imitation guns fired bullets with compressed gas and 20 out of 24 were capable of inflicting injury upon people. The latter 20 were identified as “guns” regulated by China’s Criminal Law. The individual was convicted of arms smuggling.

It is also worth noting that although a third-party platform is not technically a party to a transaction, it should bear in mind that it holds certain legal obligations due to the fact that  is is nonetheless involved in the transaction. Potential legal responsibilities of e-commerce platforms may include:

  • reviewing the authenticity of both the sellers’ access qualification and product description;
  • ensuring the traceability of parties to the transaction; and
  • assisting anti-smuggling operations by enforcement authorities such as Customs.

Some cross-border e-commerce platforms are not subject to an information sharing mechanism with Customs. This provides opportunities for smuggling activities of Haitao and overseas Daigou service providers. Currently, only a minority of e-commerce platforms cooperate with logistics companies. Whether there is an information sharing mechanism or a choice is made to voluntarily corporate with logistics companies, e-commerce platforms should always be vigilant and pay close attention to their operations so as to avoid the risks of smuggling collusion.

Model B: Self-Run Business

Generally, cross-border e-commerce enterprises are capable of conducting self-run businesses and are therefore able to achieve high revenues and carry the ability to achieve a high level of supply chain integration and organizational capabilities. Based on current operational models, it would appear that most cross-border e-commerce self-run business comply with relevant laws and regulations. However, the risk of smuggling is still worth noting under this business model.

In recent years, many cross-border e-commerce enterprises have also encountered many problems. These include raising logistical expenses and a comparative disadvantage in the supply of goods in the face of sales campaigns launched by major e-commerce suppliers such as Taobao and Jingdong. As a result, many cross-border e-commerce enterprises are experiencing difficulty in generating profits. According the Ningbo Bonded Zone Economic Service Center, there have been 518 registered cross-border e-commerce enterprises in Ningbo Bonded Zone in July of 2017. Of those, only 75 enterprises have online transaction performance. Moreover, it is estimated that 90% of the trade volumes are attributable to major e-commerce platforms such as Jingdong, Tmall International and NetEase. Faced with such pressures, a small number of e-commerce enterprises have adopted their own business models. As a result, some of them have resorted to illegal operations. These enterprises attempt to evade taxes in respect of their own services by declaring lower import prices and false product declarations. Such practices constitute administrative violations or in more serious cases, smuggling. Of course, should e-commerce enterprises intentionally engage in illegally transporting arms, ammunition, obscene articles for profit or dissemination, drugs and other contraband, this will certainly also constitute smuggling crimes.

Besides, some cross-border e-commerce giants have successfully established grand online platforms utilizing their strong resource integration capabilities. They not only conduct self-run business on such platforms but also allow other e-commerce service providers to sell products there. These giants apply the two business models above at the same time, which makes it necessary for them to pay attention to smuggling risks under both models. They need to not only ensure their self-run products go through customs clearance procedures pursuant to law but also fulfill their responsibility of supervising sellers or e-commerce service providers that utilize their platforms, in order to avoid the facilitation of smuggling by the provision of the online trading platform.

Concluding Remarks

According to relevant provisions of the PRC Criminal Law and judicial interpretations, where a company, enterprise or public institution commits a crime, the entity shall not be deemed to have committed a crime, nor be punished for it. If a company, enterprise or public institution is established by individuals for the purpose of committing illegal or criminal activities, or the commission of illegal or criminal acts within the territory of China constitutes the primary activities of a company, enterprise or public institution after its establishment, the offender shall not be punished for an entity crime.In 2015, custom officials across multiple administrative regions jointly uncovered a large-scale smuggling case. Through this operation, 5 smuggling gangs were eliminated with the arrest of 32 individuals. The convicted smugglers established a so-called cross-border e-commerce platform to conceal their smuggling activities and to provide a channel to sell illicit property. When cross-border e-commerce entities are established solely for committing smuggling activities, they are held to be individually responsible.

Besides smuggling crimes, cross-border e-commerce also faces the risk of infringing on intellectual property rights. Amazon’s recent policy prohibiting infringements on copyright, patent, trademark and other intellectual property or other proprietary right has aroused much attention. Knock-offs and infringements of intellectual property rights have long been the recurring problem of e-commerce business. Considering that e-commerce platforms might share legal infringements liabilities with sellers, Amazon thus froze the funds in the account of some sellers who had been sued for infringement. This action sounds the alarm for sellers, reminding them to take into serious consideration whether or not their import and export goods are involved in infringement of others’ intellectual property rights. It also exhibits the fact that e-commerce platforms have begun to consciously avoid infringement liabilities

Cross-border e-commerce is a relatively new business model. Nonetheless, it still exists under regulation. Without vigilance, service providers run the risk of having their actions (or inactions) constitute the smuggling or infringement of intellectual property. There are a wide variety of goods or articles that are prohibited or restricted from import and export by China’s regulatory authorities. The protection of intellectual property rights of import and export goods, correct customs declarations all require professional knowledge. This involves a combination of administrative supervision and legal know-how. What e-commerce enterprises should attach great importance to is that the combination of administrative supervision and legal responsibility. It is suggested that one way forward would be for e-commerce enterprises to adopt best practice models in the areas of government policy, process design, compliance, risk management and crisis response. Cross-border e-commerce enterprises will need to identify such risks and have a compliance plan in place. In this respect, having professional legal advice is essential. 

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In March 2019, King & Wood Mallesons (KWM) established the Belt & Road Center for International Cooperation and Facilitation (BRCICF).

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