• Trust but verify. How can a foreign owner lose a vessel due to the actions or inaction of a Russia lessee.

    2019 November 27 :

    One of the possible ways to operate a foreign vessel within the Russian Federation is to lease it on bare board charter (lease) to a Russian charterer (lessee). To achieve this goal, the vessel, within the duration of the bareboat charter, is registered in the bareboat registry of one of the seaports of Russia with the right to fly under the Russian flag, a customs declaration is submitted by the Russian lessee with the due package of documents for the customs procedure “temporary importation”. Most Russian charterers who place foreign vessels under the “temporary import” customs procedure based on registration in the bareboat charter register use the privilege provided for by the decision of the Customs Union Commission dated 18/06/2010 No. 331, which is an exemption from customs payments (customs duty and import VAT) subject to the operation of the vessel in international traffic. After completion of the above actions, a foreign vessel receives certain privileges, for example, has the right to stay in the EAEU for a long time, can carry out various types of repairs (with the exception of capital and modernization), operation in inland waterways and more are allowed. It would seem that an ideal and very convenient way to operate a vessel by a Russian lessee with minimal costs for mandatory payments. Everything would be fine, but such a “fairy tale” for the Russian charterer may be overshadowed by the sheer nightmare for the foreign owner of the vessel, sometimes not even suspecting the catastrophic consequences of putting the vessel on bare board charter to the Russian individual or legal entity.


    Not so long ago, there was a vessel company in Rostov-on-Don, which just used the above scheme for operating vessels, paid taxes, salaries, rent payments on time, and was in good standing with many contractors and government agencies.


    However, with a sudden change in management, business worsened significantly; delays in staff salaries and rental payments began. In the temporary operation of this company, there were two vessels belonging to completely different foreign owners. In 2017, the owner of the first vessel made a decision on the early termination of the bareboat charter agreement and the return of the vessel for independent operation. The vessel was excluded from the bareboat charter registry of the Russian seaport, registration under a foreign flag was restored, the crew was changed. From that moment, the vessel ceased to use the above privileges and transferred to the status of a foreign vehicle of international transportation, in relation to which the prohibitions and restrictions are provided for by Chapter 38 of the EAEU Customs Code. After that, the vessel was repeatedly imported into the territory of the Russian Federation as a foreign vehicle of international transportation. In the summer of 2018, during the implementation of the next international voyage, the vessel was unexpectedly arrested by the customs authorities of the Russian Federation for the owner of the vessel.


    As it became known later, the customs case was filed against the Russian ex-lessee of the vessel for an administrative offence for violating the terms of the temporary import procedure in the form of transferring the vessel to another person without the permission of the customs authority.


    In fact, the customs legislation of the customs union and the current customs legislation of the EAEU, when placed under the customs procedure of temporary importation, establishes certain prohibitions and restrictions, the violation of which is the basis for the payment of conditionally accrued customs payments (in connection with the application of the above privilege), the initiation of an administrative case, provided for in article 16.19 Code of Administrative Offenses of the Russian Federation.


    However, the “other” person was the company-owner of the vessel, which was originally known to customs, which was and is the owner of the vessel.


    Starting from the moment of transfer, the vessel turned exclusively into a foreign vehicle of international transportation and operated flights from Russia exclusively in accordance with Chapter 38 of the EAEU CC with the existing prohibitions and restrictions (limited stay in the EAEU, ban on cabotage, the passage of inland waterways). Of course, the foreign owner had absolutely no mercenary intentions to use this procedure, moreover, the company did not even suspect its existence, since in 2018 the vessel repeatedly entered the Russian Federation as a foreign ITV [international transport vehicle] and the customs authorities issued it as such, setting terms of its export in accordance with Article 274 of the EAEU Customs Code (during the temporary import procedure, the time spent by the vessel to start/end the voyage on the territory of the Russian Federation is not limited). However, after the seizure of the vessel by the customs of a foreign company, it became known that the ex-lessee of the vessel did not complete the customs procedure of temporary import (admission) by placing the vessel under the customs procedure of re-export.


    The problem of most cases of administrative offences brought by customs under Article 16.19 of the Code of Administrative Offenses of the Russian Federation is that the owner of the vessel is completely deprived of the opportunity to participate in the case, namely to get acquainted with the case file, file petitions and challenges, dispute the issued acts and rulings. The trial of the first example was repeatedly delayed and delayed under various pretexts. Only seven months later, the court of first instance issued a shocking decision, first of all for the owner, in the form of confiscation of the vessel, the lessee was fined in the amount of the value of the vessel.

    Five months later, a higher court, following a lessee’s complaint, cancelled the forfeiture sanction, halved the lessee’s fine and ordered the vessel to be returned to the foreign owner.

    However, by this time the costs of the owner of the leased vessel for its maintenance and losses from the lack of commercial operation exceeded half a million US dollars, the vessel was deprived of class, which led to its detention by the state port control.


    Despite the court decision on the return of the vessel that entered into legal force, the customs authorities tried to keep the vessel in all sorts of "legal" ways, delaying the declaration process, and refused to accept the declaration of departure. All these actions led to the fact that the vessel was subsequently detained and again arrested by customs, but now under Article 78 of the Federal Law “On Customs Regulation in the Russian Federation," No. 289-FZ dated 03.08.2018 for unpaid, again by the Russian lessee customs payments. Customs has already filed a claim for foreclosure on the vessel, while it is worth noting once again that customs asks to recover unpaid customs payments, interest and penalties charged to the Russian lessee at the expense of the vessel belonging to a foreign company.


    In the second case, the situation is almost the same, except that the Russian lessee did not complete the “temporary import” customs procedure on time by placing the object under the “re-export” customs procedure. However, by the time the customs procedure expired, the vessel was in a foreign port for more than a year due to class withdrawal, non-seaworthiness and the presence of a ban on leaving the harbour master. The owner could not take out the vessel, but he actively resolved the problems that had arisen with the classification society and local authorities. Despite this, the vessel was arrested by Russian customs a few days after the expiration of the customs procedure, an administrative case was instituted against the Russian lessee in accordance with paragraph 3 of Article 16.19 of the Code of Administrative Offenses of the Russian Federation. The owner of the vessel found out about the arrest and the initiated case of an administrative offence already after the decision was made to impose a fine on the lessee in the amount of 50,000 rubles and impose an additional penalty in the form of confiscation of the vessel. The higher court, following the lessee’s complaint, was still cancelled, but some time later it was again arrested while transporting the vessel across the territory of Russia, however, in the framework of the criminal case brought under article 194 of the Criminal Code of the Russian Federation against the management of the lessee on the fact of evading payment of customs duties accrued in connection with the non-completion of the “temporary import” procedure during the customs procedure. At the time of the vessel’s arrest and to date, the foreign owner has incurred expenses and losses in excess of the value of the object itself.


    In both cases, all the Russian lessee needed to do was simultaneously submit the vessels back to the owners to submit a customs declaration on placing the vessels under the “re-export” customs procedure. However, this was not done. As a result, the Russian lessee “evaporated”, the owners suffered significant losses and damage, moreover, they risk losing their property.


    But most of all in the situations described above, the position of our state in the person of law enforcement agencies and courts is striking. Indeed, we have a very strict responsibility for committing customs offences. But both cases are clearly extraordinary situations - in the first, a formal paper allegedly was not received with the consent of the customs authority to return the foreign vessel back to the owner. In the second case, the owner of the vessel was physically unable to remove the object due to the withdrawal of the class and the presence of a ban on exit from the harbormaster, which was notified to the customs. The vessel stood for more than a year in a sludge, was not operated within the framework of the “kindly” provided customs procedure. The question is, to whom and which of the examples given in this article is damaged? To what extent are the actions commensurate with the punishments and lawsuits that the owners overcome? This is clearly not on a par with the smuggling of counterfeit products, weapons or drugs, the illegal movement of money across the border, and the punishment for the above is many times milder. And what of all this do foreign owners have - only lost time, money, health, multimillion customs requirements for them instead of a lessee, and more than a high risk of losing ships.


    Carrying out economic activity in any country, a foreigner, first of all, hopes for a favourable investment climate, one of the key points of which is the absence of intricate bureaucratic delays, complicated and harsh legislation, and pressure from state bodies. The Kyoto International Convention on the Simplification and Harmonization of Customs Procedure requires a high degree of simplification and harmonization of customs procedures and practice, which is the most important goal of the Customs Cooperation Council, and thus makes a significant contribution to facilitating international trade. However, when a minor admitted "breaches" of the lessee, the discussion that remains open and available equivalent of omissions and errors by the customs authorities (by the way, left unpunished), it suffers from a foreign owner, respectively, scales with the state on the one hand repeatedly tipping the scale of foreign ownership on the other, putting the sides in an inherently unequal position.


    Thus, summing up the above, foreign owners in the transfer of vessels to the Russian lessee must be extremely careful, check and monitor every step and action of the lesser to comply with customs legislation, think deeply and react to the inaction of the counterparty, and yet several times to think about whether it is worth in any way to bind themselves to the Russian customs.


    Andrey Lopatin,

    Lawyer of marine practice, GRATA International Ростов-на-Дону 

    e-mail: rostov@gratanet.com, www.gratanet.com