Facing ASB investigations, the first reaction of corporate staff, especially executives, towards the law-breaking circumstances described by ASB officers is ignorance of the details of the circumstances. Some executives explain to ASB that their signing was simply performance of procedure. Some executives and in-charge business personnel participated in internal discussion, and know the whole story, but do not know their behavior broke law. Their typical understanding is that one’s behavior breaks law only when one knows its behavior will break law, i.e., the behavior does not break law if one does not know its behavior will break law, like ignorance is innocence. While legally speaking, they fail to understand the concept of “know" and “should have known". In other words, they should have known what one should do and what one cannot do.

Regarding the definition of “know", the Supreme People’s Court and the Supreme People’s Procuratorate stipulate in Article 8 of the Interpretation of Several Specific Law Application Issues in Handling Theft Cases (《关于办理盗窃案件具体应用法律若干问题的解释》) released on December 11, 1992 that the identification of “know" in crimes of receiving or disposing stolen property shall not depend solely on defendant’s oral confession. Analysis shall be conducted based on the facts of the case. It can be determined as long as it is proved the defendant knew or should have known the property was obtained illegally and chose to receive or dispose on one’s behalf. It is specified that “know" means know or should have known. Besides specifying the same content in other relevant regulations, it is specified in Article 5 of the Opinions on Several Law Application Issues in Handling Smuggling Criminal Cases (《办理走私刑事案件适用法律若干问题的意见》 (2002)) regarding identification of the intention of smuggling crime suspects or defendants that “know" in the intention of smuggling means the perpetrator knows or should have known the behavior is smuggling.

On December 14, 2021, in order to accurately apply the law and severely combat against cross-border smuggling at sea in Guangdong, Hong Kong and Macau, the Supreme People’s Court, the Supreme People’s Procuratorate, the General Administration of Customs, the Ministry of Public Security, and China Coast Guard jointly formulated the Guiding Opinions on Several Law Application Issues in Combating against Cross-border Smuggling Crime at Sea in Guangdong, Hong Kong and Macau (《关于打击粤港澳海上跨境走私犯罪适用法律若干问题的指导意见》) that emphasizes the circumstances under which the owner of goods knows or should have known the crime committed by others, and other circumstances where the owner knows or should have known about the criminal act can be identified. It can be seen that knowledge is the constant principle of identifying intention under Chinese law, especially in the judgment on criminal liability.

Regarding “know" includes “should have known", enterprises may consider the following for better understanding:

1. “Should have known" is a presumption based on specific facts. That is, under the circumstance then, did the perpetrator break the law deliberately? Did the perpetrator “know" or “should have known" based on his or her knowledge and experience? Legally speaking, the intention of the perpetrator cannot be presumed directly based on his or her behavior, but evidence.

    

2. “Should have known" is a legal obligation per se. Enterprises should have certain judgment on the nature and consequences of their behavior.

The operation of enterprises has very typical characteristics which are the work patterns enterprises, especially foreign-invested enterprises, have formed over the years. For example, departments involved with an issue meet to discuss the issue, and analyze the pros and cons on the enterprises. Meeting minutes are required to record the main content of the discussion and the next-step work arrangements. In the 14 years of me working in enterprises, this work pattern is followed, regardless of me in charge of supply chain, marketing and sales, or the policy research before investment in China, whether U.S. companies or German companies. However, from another angle, if the issue discussed was not fully demonstrated, for example, a misjudgment was made on market entry requirements in China, import license of product, or tax rate, the discussion of the meeting, the meeting minutes, and the subsequent implementation, from the perspective of criminal case in China, have basically met the criteria for establishing a case, intention and behavior.

In Article 18 of the Opinions on Several Law Application Issues in Handling Smuggling Criminal Cases (《关于办理走私刑事案件适用法律若干问题的意见》) jointly issued by the Supreme People’s Court, the Supreme People’s Procuratorate, and the General Administration of Customs, it is specified the determination of smuggling crime by entities and their directly in-charge persons and directly responsible persons. Smuggling crime by entities can be determined if it has the following characteristics: (1) the smuggling crime is committed in the name of the entities, i.e., studied and determined collectively by the entities, or determined or agreed by the in-charge persons or other authorized persons of the entities; (2) the majority of the illegitimate benefits or illegal gains sought for the entities belongs to the entities. According to the Interpretations of the Supreme People’s Court on Specific Law Application Issues in Hearing Cases of Crime Committed by Entities (《最高人民法院关于审理单位犯罪案件具体应用法律有关问题的解释》), depending on the different role persons of the entities play in the smuggling crime of the entities, persons directly in charge of the entities and other directly responsible persons can be pinned down to one person or several persons. Persons appointed by leaders of the entities and actively involve in committing smuggling crime, if their behavior plays an important role in the main stages of the smuggling crime, can be determined as the directly responsible persons of the crime committed by the entities.

In all the cases of smuggling crime we handled, ASB around China, based on the circumstances of investigation, usually take criminal compulsory measures, like detention or release on bail pending trial, on enterprise executives as they are very likely the decision-maker of the crime, likewise on key business persons, like financial directors and managers, business directors and managers as they are likely to participate in decision-making and take charge of implementation, and same with operational persons, especially the main in-charge persons within, as there is possibility they break the law intentionally. It is less likely criminal compulsory measures will be taken on other persons if the possibility of “know" or “should have known" does not exist. While in a cross-border transaction investigated by ASB, we noticed criminal compulsory measures were taken on a warehouse keeper. It may be due to the specific circumstances of the case.

Generally speaking, in the cases of smuggling crime committed by enterprises, employees do undertake the risk of legal liability as they participate in the process of decision-making and implementation.

During our communication with enterprise executives, like CFO, financial or tax directors, when handling smuggling criminal cases, we noticed a very typical mindset of enterprises when calculating tax is that they paid more tax at this stage or for a type of product, and underpaid tax in another field or for another product; the overall balance of tax did not cause a loss to the state’s revenue, nor to themselves. Therefore, upon analysis, their executives believe no necessary action needs to be done as the overall tax is balanced and reasonable.

Simply taking customs supervision as an example, if enterprises paid more tax, they could apply for refund. Although the procedure is complicated, it is for the purpose of strict supervision on the state’s revenues, like the strict management of enterprises on expenditure. If enterprises underpaid tax, they could apply for disclosure and supplementary payment to Customs. Customs, from the basic logic of administration, supports such action as well. However, if an enterprise knew the tax was underpaid, and decided not to pay the underpaid tax, in combination of our analysis above on “know" and “should have known", the enterprise had the intention of tax evasion from that moment; if it does not pay the payable tax continuously, the objective conditions of crime have been met.

From the operation of enterprises, according to the tax law in China and international rules, like the guidance of the Organization for Economic Cooperation and Development (OECD), VAT is turnover tax. Meanwhile, according to accounting standards, turnover tax is not included in the operating costs of enterprises in the normal circulation of commodities. So enterprises usually do not consider the amount of VAT when calculating tax costs. Taking imports as an example, enterprises will consider the import tariff and the import consumption tax of the imports, but will not pay much attention to import VAT.

It is provided in Chapter 5, Tariff, of the Customs Law of the People’s Republic of China (《中华人民共和国海关法》) the import tax levied by China Customs. China Customs levies tariff during importation, and is authorized to levy import consumption tax and import VAT. Therefore, the total import tax is the total value of the tax occurred during importation. Please note, calculation of the three types of tax shall follow the formula.

Emphasizing VAT will be calculated in the total amount of evaded tax is because, if an enterprise was determined to have intention, and the evaded payable tax has reached RMB 200,000, the enterprise will be convicted of thecrime of smuggling ordinary goods or articles and fined, and its directly in-charge persons and other directly responsible persons will be subjected to criminal liability, according to Article 153 of the Criminal Law of the People’s Republic of China (2020 Amendment) (《中华人民共和国刑法（2020修正）》) and Article 24 of the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Law Application Issues in Handling Criminal Cases of Smuggling (Fa Shi [2014] No. 10) (《最高人民法院、最高人民检察院关于办理走私刑事案件适用法律若干问题的解释》（法释〔2014〕10号).

The above four mistakes frequently occur in the smuggling criminal cases we handled. Managers, especially senior managers, of enterprises should note these mistakes so as to avoid deviation when making decisions on behalf of the enterprises which imposes risk of smuggling crime on the enterprises, and avoid the risk of breaking the law themselves.