Vaping lawyer: Compliance risks caused by cross-border parallel imports of exported vaping products

1. The definition of transnational "fleeing goods"

Transnational "fleeing goods"In this article, it mainly refers to that after the e-cigarette brand enterprise reaches export sales cooperation with downstream customers such as distributors and channel parties, the downstream customers do not abide by the relevant agreements with the e-cigarette brand enterprise on designated sales countries and prohibited countries, and adopt deception or concealment methods to transport the exported e-cigarette products to countries or regions where sales are not agreed to be allowed to be sold.

The purpose of cross-border "fleeing goods" by downstream customers is mainly due to the certain gap between market demand and product pricing (ex-factory price and sales price) in various countries. Based on interest considerations, downstream customers adopt various methods to circumvent the regional control of e-cigarette brand companies.

#p#Pagination Title #e#2. Types of transnational "fleeing goods"

(1) Classification based on the final destination of products, which are mainly divided into:

• Eventually returning to China;

• Eventually it flows between different countries.

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Among them, the first type of repatriation is currently the target of strong crackdowns by the e-cigarette authorities, but there may still be a small number of occurrences; the second type is the main type of cross-border "smuggling" at present, and may also be the main type of future supervision by the competent authorities. One of the directions, please refer to the analysis later.

(2) Classified from transnational "fleeing goods" methods, they are mainly divided into:

• Downstream customers collaborate with freight forwarders to deceive

In this case, downstream customers generally "designate freight forwarders" and require e-cigarette brand companies to entrust them to "designate freight forwarders" to handle customs declarations, cross-border logistics and other activities. At the same time, the "designated freight forwarder" is required to change the final destination goods by adopting a method that is inconsistent with the actual logistics documents and the customs declaration documents. Let the "final destination" in the customs declaration form or the "final destination" in the customs declaration form seen by e-cigarette brand companies be inconsistent with the "final destination" in the actual logistics documents, making the actual selling country inconsistent with the agreed selling country inconsistent, achieving the effect of cross-border "fleeing goods".# p#pagination title #e#

• Export to the "transit country" and then transshipment

This situation may seem common, but in reality, based on various considerations such as transshipment costs, this kind of plan may be costly to implement. However, based on interest considerations, there are also some people who take it.

3. The compliance risks and possible losses brought by transnational "fleeing goods" to e-cigarette brand companies

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According to our analysis of current policies and related cases, transnational "fleeing goods" may bring non-negligible compliance risks and losses to e-cigarette brand companies, mainly including:

• Interference with corporate operations and affect the normal development of channels;

• Administrative penalties;

• Affect tax refunds and exemptions;

• Civil compensation;

• Affect business license;#p#pagination title #e#

• Affect the approval of production scale;

• Intellectual property infringement;

• Criminal risk.

The specific analysis is as follows:

(1) E-cigarette brand companies lose control of "relevant flow directions","full traceability","product quality" and "packaging requirements", causing administrative supervision, penalties or criminal risks

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1. Responsible for "relevant flow direction" and "full traceability"

Export e-cigarette brand companies should be responsible for the "relevant flow direction" and "full traceability" of e-cigarette products. This is listed as one of the supervisory responsibilities of the "Tobacco Monopoly Administrative Department of the State Council" in Article 16 of the "Measures for the Administration of Electronic Cigarettes" issued in March 2022; and it is clarified for the first time in Article 12 of the "Electronic Cigarette Import and Export Management Rules" issued in October 2022, that is, e-cigarette production enterprises should be responsible for the "relevant flow directions" and complete export filings in accordance with the law; Article 11 of the "Guidelines on Promoting the Construction of Quality Assurance Systems for Export E-Cigarette Products" issued in July 2023 further clarifies that "the domestic and international logistics and transportation of exported e-cigarette products should comply with relevant safety requirements to ensure full traceability."

However, cross-border "fleeing goods" behavior will obviously cause e-cigarette brand companies to lose control over the flow of products. What's more, some companies may be unaware of the return of products to the country, which may obviously touch the bottom line of the competent authorities. Once it occurs, regulatory investigations may be inevitable, and how to prove that e-cigarette brand companies have fulfilled their management control obligations in accordance with laws and regulations may become a controversial point.

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If it is determined that it has not performed its management and control obligations in accordance with the law during this process, according to the provisions of Articles 35 to 37 of the Measures for the Management of Electronic Cigarettes, it may trigger investigations and inspections, regulatory interviews, suspension of platform trading qualifications, and suspension of production. Measures such as operating business until cancellation of production and operation qualifications in accordance with the law, and may be listed as a dishonest entity as a key supervision object.

2. Responsible for "product quality" issues

In the case of transnational "fleeing goods", most e-cigarette brand companies will have no effect on the quality control of exported e-cigarette products.

Article 33 of the "Measures for the Administration of Electronic Cigarettes""E-cigarette products that are not sold in China but are only used for export shall comply with the laws, regulations and standards of the destination country or region; if the destination country or region does not have relevant laws, regulations and standards, it shall comply with the relevant requirements of our country's laws, regulations and standards." This provision has appeared many times in many documents and has become the basic requirement and consensus for the quality control of exported e-cigarette products.# p#pagination title #e#

However, cross-border "smuggling of goods" may prevent e-cigarette brand companies from clearly knowing the "final destination" of e-cigarette products, or even determining whether there is a ban on the sale of e-cigarettes in the "final destination". In this case, e-cigarette brand companies cannot guarantee whether their e-cigarette products meet the "laws, regulations and standard requirements of the destination country or region", or even whether the final destination will ban the sale of e-cigarettes. When the regulatory investigation comes, it is naturally difficult to provide relevant materials to prove that they have fulfilled the export product quality standards.

In other words, the e-cigarette products exported by e-cigarette brand companies may not meet my country's quality requirements for exported e-cigarette products. In this case, whether it constitutes a criminal crime of "producing and selling counterfeit products" may become quite controversial. But at least, when the competent authorities notice such a situation, the regulatory and disciplinary measures stipulated in Articles 35 to 37 of the above-mentioned "Electronic Cigarette Management Measures" may be direct risks that enterprises need to face.

How to prove that a "quality assurance management system that includes all elements, all processes, and all data has been established in accordance with the law to ensure the effective operation of the system"? How to prove that the products you export have met quality and safety requirements? Which country does it meet the quality and safety requirements? In the case of transnational "fleeing goods", it will become difficult to prove and extremely challenging problems. The ambiguity of these issues may bring the risk of administrative penalties and even criminal investigations to enterprises.# p#pagination title #e#

It is worth noting that Articles 13 and 14 of the "Guidelines on Promoting the Construction of Quality Assurance Systems for Export E-Cigarette Products" particularly emphasize:

Article 13 If exported e-cigarette products have quality and safety problems that have caused or may cause damage to human health, the enterprise shall immediately stop the production of relevant products, take corresponding measures to avoid and reduce the occurrence of damage, and report to the local Tobacco Monopoly Bureau.

Article 14 If exported e-cigarette products are notified by international organizations or overseas government agencies due to quality and safety issues, the enterprise shall immediately report to the local Tobacco Monopoly Bureau, and the relevant enterprise shall accept the verification and handling organized by the Tobacco Monopoly Bureau in accordance with the law.# p#pagination title #e#

That is to say, if transnational "fleeing goods" are shipped to countries that ban the sale of e-cigarettes, or are shipped to countries with different quality standards for sale, and quality and safety problems arise or are notified by overseas governments, the company may be required to stop product production immediately and accept verification, which will affect the company's operations. If the consequences of losses are caused, there may also be risks of civil compensation and criminal litigation.

3. Responsible for "packaging requirements"

According to the provisions of Article 7 of the "Implementation Rules for the Packaging of E-Cigarette Products" issued in 2022,"the boxes and box packaging of exported e-cigarette products must meet the relevant requirements of the destination country or region, and be marked with the license number of the tobacco monopoly production enterprise." In the case of cross-border "fleeing goods", boxes and box packaging of exported e-cigarette products may not meet the relevant requirements of the "final destination". This may not only violate my country's regulations, trigger the aforementioned administrative supervision measures or administrative penalties, and affect domestic production and operation, and are more likely to violate the local laws and regulations of the selling country, especially if normal sales channels already exist in the selling country, different batches, The government penalties of the selling country caused by standard goods may affect sales operations through normal channels.# p#pagination title #e#

(2) Enterprises are responsible for the authenticity of customs data reported and information from industry authorities

1. Is the "final destination" in the customs declaration data inconsistent with the actual situation?

According to Article 86 (3) of the Customs Law (Revised in 2021) and Article 15 of the Regulations on the Implementation of Customs Administrative Punishments (Revised in 2022), if the declaration of the "final destination" of export goods is false, administrative penalties such as warning, fine, and confiscation of illegal income will be imposed.

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In reality, we have indeed found cases in which many companies have been administratively punished by customs because the customs declaration "final destination" is inconsistent with the actual destination.

2. Is the e-cigarette export filing promise "export destination" inconsistent with the actual situation?

Article 4 of the "Instructions for the Filing of E-Cigarette Export" issued in 2022 clearly stipulates that licensed enterprises should complete the filing of "information such as the export destination country or region and relevant laws, regulations and standard requirements" after export declaration. This filing will affect the traceability management and quality and safety management of exported e-cigarettes by competent authorities. Article 5 of the "Instructions" stipulates that "the export filing status of licensed enterprises shall be included in credit supervision. The quality and safety control of exported e-cigarette products and the authenticity of export filing information are important considerations in the verification of production scale."

#p#Pagination Title #e#Further, the "Letter of Commitment for the Filing and Management of Export E-Cigarette Products" required by the Export Filing Office clearly states that the reporting unit should truthfully declare the "exporting country" and applicable quality standards and regulations, and should promise that "if false promises are involved, the product filing shall be revoked in accordance with the law and announced to the public. Disciplinary measures shall be implemented in accordance with laws and regulations for false promises and dishonest behaviors. If it involves infringement of the legitimate rights and interests of third parties or public interests, it shall be liable for compensation."

To sum up, it can be seen that the registered "export destination" caused by cross-border "smuggling of goods is inconsistent with the actual destination, which may lead the competent authorities to believe that the licensed enterprise has not truthfully declared in the future, which will affect the supervision of export flow and quality, and may further lead to Adverse consequences such as administrative supervision measures and administrative penalties. In serious cases, it may also affect the verification of the future production scale of the enterprise and affect the normal operation of the enterprise.

(3) Affect enterprise value-added tax refund (exemption)

Whether the customs declaration information is inconsistent with the facts at the time of customs declaration, or the customs declaration agent modifies the sea bill of lading or other transport document after customs inspection and release, resulting in the inconsistency between the export goods declaration form and the relevant content of the transport document, it may affect the enterprise's value-added tax refund (exemption) implementation. The basis is as follows: #p#pagination title #e#

According to the "Notice of the Ministry of Finance and the State Administration of Taxation on Policies for Value-added Tax and Consumption Tax for Export Goods and Services"(Caishui [2012] No. 39):

... 7. Export goods and services subject to the VAT taxation policy

The following export goods and services are not subject to VAT refund (exemption) and exemption policies. VAT (hereinafter referred to as VAT) shall be levied in accordance with the following provisions and other provisions deemed to be levied on domestic goods:

... 5. Goods with forged or false contents in the VAT refund (exemption) certificate of an exporting enterprise or other unit.# p#pagination title #e#

... 7. An export enterprise or other unit has one of the following services for export goods: ...(4) After the export goods are inspected and released by the customs, it itself or the entrusted freight forwarder modifies the name, specifications, etc. on the sea bill of lading or other transport documents of the goods, resulting in inconsistency between the export goods declaration form and the relevant contents of the sea bill of lading or other transport documents.

According to the "Announcement of the State Administration of Taxation on Issues Related to Value-added Tax and Consumption Tax on Export Goods and Services"(State Administration of Taxation Announcement No. 65 of 2013):

13. Among the materials submitted by export enterprises to national commodity inspection, customs, foreign exchange administration and other departments that implement supervision and verification on matters related to export goods in accordance with regulations, if the above-mentioned departments or competent tax authorities find that they are false or the contents are false, the corresponding export goods shall not be subject to the value-added tax refund (exemption) tax and exemption policy, but the value-added tax taxation policy shall apply. Those found to be tax fraud shall be dealt with in accordance with corresponding regulations.

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(4) Intellectual property infringement issues

The protection of intellectual property rights is generally regional. Each country's intellectual property regulations such as trademarks and patents are different. When the e-cigarette products of a licensed enterprise "flee" to other countries without any expectation or preparation, intellectual property rights infringement issues may arise, and the fault liability for such "fleeing" will not be discussed. As a business entity on the packaging of e-cigarette products, if intellectual property infringement issues arise, the business entity may have to deal with them seriously.

(5) Affecting business licenses

#p#Pagination Title #e#Based on the above discussion, transnational "fleeing goods" may trigger administrative supervision and punishment or administrative penalties under various circumstances. It should be noted that such administrative penalties may directly affect the renewal, application and validity period of production enterprise licenses. Details of the above relevant provisions are as follows:

"Detailed Rules for the Administration of Tobacco Monopoly Licenses for E-Cigarette Related Production Enterprises and Wholesale Enterprises"(released in 2022):

Article 14? No production enterprise license will be issued under any of the following circumstances: ...(3) The applicant is punished more than twice by law enforcement agencies or is held criminally liable within one year for producing and selling counterfeit products, infringing intellectual property rights, illegal production and operation, etc., and the applicant applies for a production enterprise license within three years...(7) Backwardness of process equipment, substandard product quality, substandard hazardous chemical management and environmental protection, production safety risks, violations of laws and regulations, etc....

Article 45? Under any of the following circumstances, the issuing authority may order the holder to suspend the e-cigarette-related production and operation business and rectify it until he is disqualified from engaging in e-cigarette-related production and operation business in accordance with the law: ...(3) For illegally engaging in e-cigarette-related production and operation business, the Tobacco Monopoly Bureau or other law enforcement agencies has been punished more than twice within one year...#p #Page Title #e #

"Notice on Carrying out the Replacement of Licenses for Tobacco Monopoly Production Enterprises Related to E-Cigarette"(issued in 2023):

(4) Dynamic adjustment of the validity period of the license.

The validity period of the license is reasonably determined based on the daily supervision and relevant inspection results, as well as the operating status of the certified e-cigarette-related production enterprises, product quality and safety guarantees, etc.

(5) Interfering with corporate operations and affecting the normal development of channels #p#paginated title #e#

In addition to the regulatory actions and related legal actions discussed in the above, which may affect the normal operations of enterprises, one more point cannot be ignored, that is, the impact of transnational "fleeing goods" behavior on the operations of corporate channel customers. If transnational "fleeing goods" behavior is allowed to occur, the normal sales channels of the final destination country of "fleeing goods" will inevitably be affected, and brand credit and product quality guarantee credit will also be affected.

4. Several recommended measures to deal with transnational "fleeing goods" behavior

When our customers asked us how to deal with it, the first thing we thought of was to limit such situations in terms of contract breach. However, after further factual and relevant case studies, we believed that this might not be enough. After sorting out, our current relatively complete recommended measures are as follows: #p#pagination title #e#

(1) In terms of downstream customers

1. Agreed with the customer on breach clauses, legal application and dispute resolution clauses

The first thing that should be thought of is to stipulate the "final place of sale" as a cooperation condition in the contract with the customer, and agree that violation of this clause will make the purpose of the contract impossible, and agree on appropriate liquidated damages. It should be noted that because different countries are involved and the clients are basically overseas entities, it is recommended to agree on the applicable legal terms and agree to arbitrate the dispute between the two parties at the arbitration place agreed by both parties (for cost considerations, it is recommended to choose domestic). This can not only save the cost of dispute resolution to a certain extent, but also keep the matters disputed by both parties confidential (arbitration is confidential in principle) to avoid unnecessary leaks.

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2. Establish downstream customer credit management system

Enterprises with conditions can consider establishing a credit management system for downstream customers, formulating credit management rules, and considering increasing deposits, reducing discounts or terminating cooperation for downstream customers who breach of contract and dishonesty.

3. Consider changing the promotion and preferential model of downstream customers

This advice comes from a criminal verdict. Based on the judgment, we suggest that companies can consider linking some preferential methods to "designated sales countries" and consider appropriately adopting the "post-payment preferential" model to encourage downstream customers.

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The process of preferential methods recommended to consider is: agree on the amount of preferential purchase deduction for downstream customers in the current period, which is determined based on the purchase/sales amount sold in the "designated selling country" in the previous period; agree that when applying for the preferential purchase deduction for the current period, Relevant supporting documents for the purchase/sales amount sold in the "designated selling country" in the previous period must be submitted; e-cigarette brand companies determine the current preferential deduction amount based on relevant supporting documents.

This has two functions. One is to increase the action costs of transnational "fleeing goods" customers without affecting other normal customers; the other is that if transnational "fleeing goods" customers use false information to obtain preferential payments, it is highly likely to constitute a serious breach of contract and may be suspected of contract fraud, so as to prevent transnational "fleeing goods" behavior as much as possible.

4. Express interests to downstream customers

Formulate relevant publicity policies or notices to express their interests to downstream parties, and inform them that if transnational "fleeing goods" behavior is discovered, it will resolutely report it to the e-cigarette authorities and customs departments based on legal and compliance operations, and inform downstream customers of relevant civil and administrative penalties and criminal risks.# p#pagination title #e#

Specific implementation plans can be further exchanged and discussed with us.

(2) In terms of freight forwarding

Freight forwarding is an indispensable part of many transnational "fleeing goods" behaviors, and how to handle freight forwarding is also a critical issue. The first thing that needs to be clarified is that all freight forwarders, as long as the enterprise signs the power of attorney, have formed a principal-agent relationship with the enterprise. They need to be responsible to the enterprise, and their actions also represent the enterprise.# p#pagination title #e#

1. Express interests to the freight forwarder and agree on liability for breach of contract

Formulate relevant publicity policies or notices to express their interests to freight forwarders, and inform them that if false customs declaration and transportation are discovered, they will resolutely report it to the customs department.

According to relevant regulations, if the report is true, he will face penalties such as fines, suspension of practice, and cancellation of customs declaration qualifications.

#p#Pagination Title #e#At the same time, whether it is a freight forwarder appointed by the customer or a freight forwarder that cooperates with itself, it is recommended that as long as it needs to sign a power of attorney, it is required to sign a cooperation agreement, stipulating liability for breach of contract, application of the law and dispute resolution methods.

2. Establish a freight forwarding credit management system

The reasons are the same as the downstream customers chapter.

3. Formulate a logistics and customs declaration review system, collect and verify pre-prepared manifests, ocean bills of lading and export customs declarations

Formulate domestic and foreign logistics and customs declaration review systems, and require freight forwarders to promptly provide pre-equipped manifest, sea #p#pagination title #e#in the corresponding processShipping bills of lading and export customs declaration forms, and check relevant information to ensure that the information is consistent.

written in the end

Deceptive passive cross-border "fleeing goods" will bring unpredictable risks and losses to e-cigarette brands and companies. In this article, we try our best to sort out the risks involved and recommended measures. Some risks may not be "urgent" at present, but regulatory standards cannot be ruled out and may be further tightened. The recently released "Guidelines on Promoting the Construction of Quality Assurance Systems for Export E-cigarette Products" also reflect to a certain extent that When the first phase of supervision of the elimination of "illegal e-cigarettes" in China is over, it is very likely that there will be further regulatory actions on the export of e-cigarettes. What we can do is to prepare as much as possible and think about how to prove that we have fulfilled our reasonable review obligations and no fault in the cross-border "fleeing goods" behavior, which may become the key to avoid unnecessary regulatory risks.

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At the same time, based on the current compliance status and regulatory trends of export e-cigarettes, we are also considering working with you to jointly build an "export e-cigarette compliance library" to cope with the turbulent domestic and foreign policy trends. Interested lawyers, legal officers or friends related to e-cigarette business compliance can contact us and welcome to create a shared and co-constructed e-cigarette export compliance information platform.