Shu Jin Law Firm and Howse Williams advise on the first smuggling of waste oil case in the PRC.
Introduction
At COP27, the Green Shipping Challenge was launched, to encourage commitments to green shipping, as world leaders recognise that clean shipping can be the foundation of sustainable supply chains.
In many different aspects of clean shipping, China is doing its part. In this article we look at how the Chinese authorities investigated and penalised the smuggling of waste oil.
Waste Management in the PRC
Sludge is the residual waste oil product generated during the normal operation of a ship such as from the purification of fuel or lubricating oil for main or auxiliary machinery1. It causes marine pollution if discarded by ships into the seas. The International Convention for the Prevention of Pollution from Ships ("MARPOL") is the main international convention covering prevention of pollution of the marine environment by ships from their operation or accidental causes. China is one of the signatories to MARPOL. Regulation 38 of Annex I of MARPOL places an obligation on the signatory states to provide adequate reception facilities in their ports by stipulating that "the government of each Party to the present Convention undertakes to ensure the provision at oil loading terminals, repair ports and in other parts in which ships have oily residues to discharge, of facilities for the reception of such residues and oily mixtures… to meet the needs of the ships using them without causing undue delay to ships”.
In China, the Prevention and Control of Water Pollution Law, Measures of the Customs of the PRC on Regulation of Inbound and Outbound Transportation Vehicles and other relevant regulations, regulate the collection, transportation, and treatment of sludge. Under the Chinese legal framework, there are established mechanisms for the treatment of waste, which requires collectors of sludge from ships to make customs declarations2 and reports3, and arrange for transport of the waste to approved treatment plants for disposal4. Finally, such a collector must provide Customs with a "non-hazardous treatment certificate" issued by the treatment plant.
In this case, certain port waste reception companies did not charge for their services or pay the ships to purchase the waste. They made money by covertly extracting oil from the waste and selling it. The waste was not transported to the treatment plants; instead the oil in the waste was illegally extracted by way of oil-water separation in unlicensed treatment facilities and then sold. To compensate for the loss of volume from such extraction, these companies added river water to the residual liquid which was then sent to licensed sewage facilities for treatment. Without knowing that the waste being treated in the facilities had been diluted and most of the oil content extracted, the sewage facilities issued the non-hazardous treatment certificates. The companies made false verifications of the waste to Customs authorities.
The companies were investigated for smuggling waste in violation of the Measures of the Customs of the PRC on Regulation of Inbound and Outbound Transportation Vehicles and other Chinese laws and regulations.
Monitoring
Following the nation-wide operation "Blue Sky 2020" (蓝天2020) in 8 provinces by the Chinese Customs authorities to combat waste smuggling, some ten companies were identified as being in breach of the Chinese rules. Shu Jin Law Firm in Shenzhen was selected as the Third-Party Compliance Monitor by the People's Procuratorate of Shenzhen City to investigate and build and monitor compliance programs for the ten companies. Howse Williams in Hong Kong provided practical insights on relevant international laws and best practices.
Following a 2-day compliance hearing presided over by the People's Procuratorate of Shenzhen City, these companies were found to have remediated their prior deficiencies and 8 of them were therefore not prosecuted for their previous breaches pursuant to deferred prosecution agreements (2 of them had been prosecuted in the People's Court of Shenzhen before the remediation and the People’s Court of Shenzhen is still deliberating how to handle those 2 companies). This is the first use of deferred prosecution agreements by the Chinese authorities.
Key Takeaways
Increased regulatory attention
With COP 27 just having taken place in Egypt, environmental crimes generally are at the forefront of regulatory scrutiny. This follows the Green Shipping Challenge and the Ocean and Climate Change Dialogue organised under the United Nations Framework Convention on Climate Change earlier this year and there is likely to be increased political efforts and practical action. Activities that are non-compliant with local laws (which are often based on international conventions) will be investigated and penalised. In addition, any disclosures which are false and or misleading – such as representations made to authorities or third parties – may constitute separate, and serious, offences.
Money Laundering
Polluting the environment? The offence may not be limited to a breach of environmental laws. Be aware that it may also be a money laundering offence. There is a growing consensus that environmental crime is destroying the planet's natural resources and threatening sustainability initiatives. A recent publication by UNEP INTERPOL indicates that environmental crime has grown to be the world's fourth largest crime sector in just a few decades. The Basel AML Index now includes a new environmental indicator, out of 18 indicators, and assigned a 5% weight. Investigations will increase; the Basel Institute's Green Corruption programme is a multi-disciplinary initiative that targets environmental degradation using anti-corruption and governance tools. The Financial Action Task Force, an AML/CTF international body of which the PRC and Hong Kong are members, has recommended that environmental crimes should be considered predicate offences for money laundering. We predict that this will be a risk in the next few years that corporations and their senior management cannot afford to ignore.
Shareholder action
Activist shareholders looking to change ESG practices at listed companies have been heartened by successful efforts to get boards to be more proactive in relation to climate change issues. Three director seats at ExxonMobil were filled following a climate action campaign by Engine No.1, a shareholder with a 0.20% shareholding. Corporations and directors should be prepared for more assertive shareholders.
Reputational damage
Penalties are rarely private; names of offenders and details of their misconduct are usually made public. Regulators are now often informing the markets of their investigation and enforcement intentions. For example, the Competition and Markets Authority in the UK has issued a Green Claims Code and its investigations into misleading environment claims are ongoing, such as a recent investigation into the fashion industry around potentially misleading green claims.
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1Regulation 1 of Annex I of MARPOL.
2Article 30 of Measures of the Customs of the PRC on Regulation of Inbound and Outbound Transportation Vehicles.
3Article 17 of Administrative Regulation on the Prevention and Control of Marine Environmental Pollution Caused by Vessels.
4Article 34 of Measures of the Customs of the PRC on Regulation of Inbound and Outbound Transportation Vehicles.
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信達律師事務所及何韋律師行的聯營合作展現了協同效應及在國家和國際層面上提供一流法律服務的能力。
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Andy See
Shu Jin Law Firm
Chairman of the Compliance & Regulatory Committee
M +86 133 0112 8899 / +852 9028 0288
Jill Wong
Howse Williams
Partner, Regulatory Practice
T +852 2803 3670
M +852 5180 1836
F +852 2803 3618
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.