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Lulu Island Winery Affair a Warning for Canadian Firms Exporting to China

Posted June 20, 2017

The case of two Canadian winery owners that have been detained in China for more than a year and are now potentially facing life imprisonment after having been accused of smuggling by customs authorities should serve as a stark warning to others seeking to do business in that country, says the couple’s 23 year-old daughter Amy Chang.

As has been widely reported in recent weeks, Richmond-based Lulu Island Winery owners John Chang and his wife Allison Lu were arrested by Shanghai customs officials on March 25, 2016 as part of a sweeping crackdown on undervalued ice wine being imported into China from Canada.  

With operations in British Columbia and Ontario, the award-winning company had previously claimed that it accounted for almost 20% of Canadian wine exports to China. The subject case involving almost $60 million of goods happened to include 2,000 cases of product from the Lulu Island Winery that Chinese state media website Legal Daily reported had been declared at roughly 10 yuan a bottle (under $2) when its “fair market” transaction value presumably should have been considerably more than that amount.

However, according to a legal brief prepared by the law firm Fasken Martineau on behalf of Lulu Island Winery and submitted to the Canadian government in an appeal for diplomatic assistance, the “excessive power of China Customs to unilaterally jail the owners of a reputable Canadian business on a mere allegation of non-compliance with customs valuation rules, and to detain them in jail for more than one year without hearing or any meaningful recourse to justice, is a gross violation of personal liberty and security.”

Accusing Chinese Customs of arresting the couple without evidence and spending nearly a year attempting to substantiate the charge, the brief maintains that China’s action “is on its face outrageous and unconscionable” and is a “violation of China’s basic international trade obligations.” In this regard, the law firm argues that China’s customs officials did not follow World Trade Organization rules when it came to discretion in customs declarations, insofar as ignoring “procedural safeguards” by failing to provide any written reasoning for its charge of undervaluation and by not providing any reasonable time or opportunity for the company to adequately respond to the allegations.

Further maintaining that Beijing breached the UN general assembly’s body of principles for the protection of persons under any form of detention or imprisonment, the law firm called on the Trudeau government to “secure the immediate release of Mr. Chang from detention and permission for both Mr. Chang and Ms. Lu to return to Canada pending a resolution of their valuation dispute.”

Aside from the now intensely political aspect of the matter and returning back to cautionary alarm sounded by the Changs’ daughter, veteran journalist Dan Harris, author of the excellent China Law Blog, keys in on the perils of dealing with China’s customs authorities, providing this non-nonsense assessement of their disposition: “No matter how warm and fuzzy you want to get with China customs, it has zero desire to get all warm and fuzzy with you. Their goal is to fine you as much as they can and then maybe just toss you in jail for good measure. Their goal is to make their quotas and you are their quota. If China customs comes gunning for you, seek help and fast.”

Harris offers some invaluable advice for prospective Canadian exporters to China, the first of which appears to relate directly to the case in issue:

Do not underreport or in any other way lie to China customs. China customs is really good at discovering the truth and they — like pretty much everyone else — do not like those who try to dupe them. What always shocks me is not that the companies that come to our China lawyers after having been caught by China customs were caught by China customs, but their shock at having been caught. If your website says you sell your widgets for USD$1850 and you declare their value with China customs at USD$450, you will get caught. If you have a valid basis for pricing your product differently for China (maybe the product just looks the same as the one on your website, but it isn’t) you may be able to avoid a customs problem. But if you don’t, you are in trouble and saying that everyone else does it or that your Chinese general manager told you to do it is not a defense.

Click here for additional tips from Harris about the subject of how to avoid jail time in China, but also more generally to discover a wealth of helpful insights and other information about the practical aspects of Chinese law, how it variously impacts business there, and the ways it can best be leveraged to your advantage.