The New York Times, in its inimitable style, is shocked (shocked, I tell you) and appalled (appalled, I tell you) about China’s recent detention of a German (and his “Chinese associate”) on charges that they undervalued imported art to avoid USD$1.6 million in customs duties.
I have a very different take on the whole thing.
First off, let me state right off the bat that I have no facts regarding the guilt or the innocence of these two individuals. None. Zero. Zilch. Nada. So this post is not so much about them. It is instead, about the countless companies that have come to my international law firm with plans to undervalue their imports with Chinese customs, based on the belief that “this is what everyone is doing.”
Before I talk about what we see on this front, let me give some of the background regarding this particular fine arts customs case, and what better way to do so than to let the New York Times set the stage:
Gallery openings are a bit more subdued, anxious art dealers have been keeping a low profile, and several wealthy collectors have been barred from leaving China while the investigation continues. Auction house giants like Sotheby’s and Christie’s have been asked to cooperate with the authorities in what has become a wide-ranging investigation.
“Lots of people here are not going into work, or they are only using junior staff at their offices and galleries,” said a Beijing gallery director who spoke on condition of anonymity because of the tension surrounding the issue. “They can’t arrest everybody, but everyone is still nervous.”
In the meantime Nils Jennrich and Lydia Chu, employees of the art-handling company Integrated Fine Art Solutions, languish in a Beijing jail on suspicion of smuggling, a crime normally associated with the illegal importation of drugs or arms. The charges carry a maximum of a life sentence.
Needless to say, this experience has not been pleasant for Mr. Jennrich, as the New York Times makes all too clear:
Mr. Jennrich, 31, the company’s general manager and a German citizen, was taken away on the evening of March 30 during a raid of the business’s Beijing offices; hours later Ms. Chu, 29, its operations manager, was summoned for questioning. Mr. Jennrich’s family and colleagues have expressed concern for his health, saying he has been forced to share a cell with 11 others. During the first days of his detention, they added, he was interrogated for 36 hours straight, a violation of Chinese law.
“It’s a living nightmare,” said Mr. Jennrich’s fiancée, Jenny Dam, who said the couple had planned to marry in May.
And the New York Times blames China because, apparently:
The detentions have put a spotlight on the mercurial Chinese legal system and raised questions among collectors and industry executives about the potential pitfalls of China’s fast-growing art and antiques market, which last year surpassed the United States to become the world’s largest, according to the European Fine Art Foundation. The crackdown, industry professionals have warned, could dissuade Chinese collectors from bringing home art purchased abroad.
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“China is supposed to be a lot more integrated with the world economy,” said Jonathan Schwartz, chief executive of Atelier 4, an art logistics company based in New York. “The decision to throw someone in jail tells you that China is not really playing by similar rules as the other large nations that are dealing with culture and transit.”
The CEO of Jennrich’s company had this to say:
“We forward, store and install artwork, that is all,” said Mr. Hendricks, who was also questioned in Beijing by the authorities but was later allowed to leave the mainland. “Determination of value, the statement of this value, is not our responsibility.”
According to “legal experts,” “art handling firms simply work with the values provided by their clients, but that Chinese law is murky on whether individuals employed by shipping companies can be held liable for undervaluing a work.”
The New York Times then quotes from Jennrich’s lawyer and the Chinese associate’s fiancé:
Nancy M. Murphy, a lawyer at the Beijing firm Jincheng, Tongda & Neal, who is advising Mr. Jennrich’s family, said she hoped that the authorities would take into consideration whether the accused personally profited from undervaluing the work in question.
Ms. Chu’s fiancé, Benoit Granier, said he found the accusations hard to fathom, given Ms. Chu’s modest life, including sharing an apartment with five others. “She’s just trying to find a way in her life,” he said.
The New York Times then seems to justify whatever wrongdoing may have occurred:
Setting aside questions of Mr. Jennrich’s and Ms. Chu’s culpability, several industry experts say the practice of undervaluing art and antiques on Chinese customs forms is widespread. The International Convention of Exhibition and Fine Art Transporters, a trade organization, noted the problem last year in a newsletter and suggested that the practice was harmful to all involved. “There is no way around these regulations without breaking the law,” it wrote.
In China imported art is often levied with duties that can reach 35 percent of an object’s value. Many industry veterans complain of a customs process that is notoriously onerous.
International art experts acknowledge the difficulty of valuing contemporary art, noting that a wild jump in price at auction after a piece passes through customs does not necessarily suggest undervaluing at the border.
Ms. Murphy, the lawyer, said it took an experienced appraiser to know the difference between fraud and the vagaries of a white-hot art market.
As much as I feel for those arrested, I cannot help but have a different take on things.
Let me explain some of my beefs with the New York Times’ article and then I will discuss why this case could very well matter for YOU.
I doubt very much that many jails are particularly nice places to stay and we do not need the New York Times reminding us of that. I mean, how often does the New York Times mention jail conditions in its other stories, and in a way designed to evoke sympathy for the person detained?
And I just love how the Times mentions how these two defendants are “languishing” in prison on a smuggling charge, “a crime normally associated with the illegal importation of drugs or arms.” Really? I have always thought of “smuggling” as importing or exporting something contrary to customs laws and, hey, guess what, Meriam Webster agrees with me on that. It defines it as importing or exporting “secretly contrary to the law and especially without paying duties imposed by law.”
And the bit about this arrest putting “a spotlight on the mercurial Chinese legal system” and harming China’s lack of integration with the world economy is a bit over the top (O.T.T.). I really get the sense from this (and from much of the rest of the article) that the New York Times is essentially saying, “hey, these people love art and so even if they did violate the law, we should let them go because that is how we here in the West would handle this sort of thing.”
But where the article really falls short is when discussing the core question. If these two defendants did undervalue the art, did they do anything wrong? They say legal experts find the law “murky” but then, Ms. Murphy, a lawyer involved in this case on the side of Mr. Jennrich (and a very fine lawyer, I might add) seems to say that his defense plan is not going to be that he did nothing wrong, but instead to seek mercy from the court because he didn’t make much money on the deal. Mr. Chu’s fiancé hints at the same thing. It would have been good if the article had given us more insight into their possible defenses.
The article then talks about how difficult it is to stay within the law because the paperwork can be onerous and because so many cultured and sophisticated art buyers just really don’t like paying up to 35% duties on fine art. Come on.
Now let’s talk about the more quotidian world in which my law firm deals. A few years ago, we were approached by someone wanting to import art who was essentially seeking our imprimatur for them to undervalue their incoming art shipments. We wanted nothing to do with this client, who kept trying to assure us “that this is what everyone in China does” and that “you have to do this if you are going to import art into China.” I do not remember our exact response in this instance, but I am going to assume that it was the same as the one we always give to people in similar circumstances, which is something along the following:
Look, it’s illegal and our advice to you is that if this is really what is required to survive in this business, you should find another business. And just because “everyone” else is doing it and not getting caught doesn’t mean you won’t get caught. In any event, we want no part of this because we know it to be illegal and it just isn’t worth it to us — for a whole host of reasons — to be associated with it. And, if you are going to be doing something illegal, why do you even want an attorney anyway? Our job is to help you do things legally.
We have received a number of similar requests outside the art world as well.
I apologize for the lawyer related digression here, but I cannot resist mentioning a great China Hearsay post from a few months ago on the lawyer’s role in when confronted with a client who intends to violate the law. The post is entitled, Should You Fire Your Corrupt Client, and the conclusion is that lawyers should, for their own benefit:
My students at this point often ask what happens if, after the lawyer carefully explains that the company may be in violation of the law, the client refuses to stop? Is that the time to go to the police? No, you still don’t report on your own client. Your response, however, will depend on your role as outside counsel (i.e., what you were hired to do).
For example, if I was hired to review a commercial contract, I do my job, briefly mention the FCPA issue to my client, and then get out. I’ve given proper legal advice to my client, even venturing briefly into a topic unrelated to the matter I was hired to handle. After that, it’s the client’s responsibility to clean up its act.
As a side note, exactly who you send this advice to is often a difficult question, one that trips up my students on occasion. If you don’t understand how large companies operate and who the different constituencies may be at a multinational, your life as outside counsel can be rough. Just to use one hypothetical, what if you were hired by a local manager, and then you discover bribery? Do you report this to the regional HQ? Corporate HQ? Or do you keep that local manager who hired you happy and just talk to him? (Most lawyers I know would do the latter, but in some cases, it isn’t possible and you have to go over that person’s head.)
Let’s change the facts slightly. What if this is a long-term client for which you are acting as general outside counsel for corporate matters? Now it’s a little more complicated. If, after counseling the client on the bribery issue, they decide to continue violating the law, I would probably try to drop that client as soon as possible.
Are lawyers ethically obligated to “fire” their clients who engage in such activities? In many jurisdictions, the answer is no. I always figured, however, that it isn’t worth the risk to associate oneself with a client like that. While I sympathize with clients who tell me that all of their competitors engage in bribery, and if they do not do so as well, they will not be able to survive, at the end of the day, that’s not my concern. I’m going to discharge my obligation to my client, but once that’s done, I’m going to look out for my own liability and professional reputation.
Back to our regular programming and to how all of this relates to you, the company doing business in or with China. Here are the basics you need to know:
- China has laws.
- China enforces those laws.
- We can argue all we want about whether those laws are enforced equally as between foreigners and Chinese citizens, but the bottom line is that they are sometimes/oftentimes/always enforced against foreigners.
- If you violate the law in China you could very well face criminal action.
- If you are facing criminal action in China, your embassy/consulate are of very little help. They can help you find the right lawyer and bring you food and magazines in your own language, every few weeks, but not much more than that.
In The Sentencing Of Matthew Ng. A Very Long “No Comment,” we spoke of the risks of criminal activity and the almost blithe attitude too many foreigners have about it:
We have many times written of the risks foreigners face of being found on the wrong side of China’s criminal laws. I cannot emphasize enough the need for foreigners to take China’s criminal laws seriously. My firm has helped oversee a number of criminal cases in China involving foreigners in China and I cannot tell you how tired I am of hearing our clients confidently (at least initially) seek to assure us that they will be fine because what they were doing helped bring jobs and money to China.
We are always emphasizing that China will, with little or no compunction, jail foreigners who violate China’s criminal laws, even if the offending action is not a crime back in the home country. And forget about getting much help from your embassy beyond maybe some help in finding your lawyers and seeking to monitor your case for procedural fairness.
Similarly, in Avoiding Chinese Jails. I’m Talkin’ To You, we had this to say about the need to follow the laws in China:
Aimee Barnes highlights how important it is for foreigners to follow the law in China. All of the laws. All of the time. No matter how much you may disagree with them, no matter how silly you may find them, and no matter how different they may be from those to which you are accustomed. Most importantly, you must strive to follow the law no matter how much you may see those around you disobeying them, particularly if those you see are not foreigners.
And when it comes to customs in China, we are seeing a huge increase in customs people trying to turn even honest mistakes into criminal matters. We have successfully handled a number of these cases and we have done so by responding to the problem immediately, by taking the problem very seriously, and by getting as much information to Chinese customs as quickly as possible and in as helpful and proper a form as possible. By proper, I mean that customs wants everything apostilled and consularized, so that is how we do it. We have found that customs initial assumption is that there has been criminal activity, but that if you work with them, they absolutely can be convinced that it was really just an honest mistake (presuming that you have real proof that it was just an honest mistake). When it comes to customs, we have found that the key is to deal with any problems early and head-on. I have absolutely no idea whether that would have even been possible in the art case discussed above (I doubt that it would have been), but it usually is.
Overall, in the last six months we have seen an absolutely unprecedented increase in China’s tightening down on its laws as they apply to foreigners. (It is possible that China is cracking down on its laws with respect to everyone, but because my law firm just represents foreigners in China or doing business with China, as opposed to Chinese citizens in China, we do not know if that too is the case.) China is shutting down improperly formed WFOEs like never before. Beijing is left and right shutting down WFOEs that do not have the proper facilities or are operating outside their scope of business. And we hardly need to tell you about the recent crackdown on foreigners in China without proper visas. There is an easy explanation for all of this and we have seen it before (though never to such an extent). It’s the economy, stupid.
Bottom Line: Again, I have absolutely no independent information regarding this case and this post is not meant to opine on the guilt (or the innocence) of anyone involved. It is meant only to highlight how easy it can be to find yourself on the wrong side of the law and to emphasize the need to know the laws of the country in which you are doing business and to not violate those laws. I hate to sound so trite, but the key for you if you are doing business in China is simple: follow the law no matter what.
What do you think? What are you seeing?