The Bad Smell of China Customs Circumvention

Last week it was reported that over $480 million worth of frozen meat – some of which dated from the 1970s – had been illegally smuggled into China where it was seized by Chinese customs officials. The frozen beef, chicken, and pork products had never passed through China Customs and, consequently, had not been inspected for compliance with required Chinese health regulations.

Is it even possible that the buyers of these frozen meat products did not know that the meat they were buying was spoiled and posed health risks to Chinese consumers? Two principal considerations should inform a buyer’s decision to buy particular products: (1) the seller’s identity and (2) the authenticity of the product.

In the case of China’s tainted meat products, it would seem that the buyers would only have needed to conduct the minimal amount of due diligence – either looking at or smelling the meat products – to know that the meat was a health risk. However, for buyers in most other cases, understanding the risks associated with purchasing certain products requires due diligence efforts on both the vendors and the actual product being purchased.

Sometimes sellers view a buyer’s due diligence as indicating the buyer does not trust the seller. In those situations, you should explain the need for due diligence as a necessary to ensure compliance with various countries’ regulations. Buyer due diligence typically includes reviewing government databases and official copies of the seller’s business formation documents and business licenses, and sometimes the seller’s financial records as well.

In addition , U.S. companies should also review U.S. lists of sanctioned countries and entities to confirm that neither the seller nor any of its owners or managers are on such lists. Any questions about whether an individual or entity is on U.S. sanctions lists should be resolved before you undertake the contemplated transaction.

American companies doing transactions with Chinese companies will often want to determine whether the Chinese company on the other side is a state-owned enterprise (SOE). This is helpful to know because bribery and corruption risks are always going to be greater with SOEs and American companies that do business with SOEs should ensure that their standard operating procedures (“SOPs”) minimize and address risks of bribery and corruption.

Concerning the goods themselves, buyers should ensure that the purchased goods comply with the regulatory requirements of both the exporting and importing countries. At minimum, purchasers should ensure that the goods have an official certificate of origin and are clearly documented on applicable shipping and commercial documents. In addition to obtaining documentation demonstrating your due diligence efforts, you should archive such documentation just in case you ever need it to support your position in any regulatory or court proceedings or in the event of a consumer complaint.

Not all products obtained from illegal parties or in illegal ways will look or smell as bad as last week’s 40-year-old meat. However, buyers committed to minimizing regulatory or public relations risks should undertake commercial relationships as if they did smell this bad – at least until you know and trust your business partners and the goods you are buying.

The post The Bad Smell of China Customs Circumvention appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.