Luxury Goods Imports

What AML and sanctions issues actually are

Luxury goods such as watches, jewellery, precious metals, art, or antiques have characteristics that make them suitable for laundering proceeds of crime. High value, easy transport, and the existence of a secondary market create an environment where illegal funds can appear to be legitimate assets.

Complications arise at the moment of import, when you purchase goods from a supplier in Thailand and declare that they are of Thai preferential origin. If, however, they actually originate from China or Russia, you are committing a serious breach of regulations.

Regulators view such conduct as a signal of potential sanctions evasion or money laundering. The main supervisory authorities include the Czech Customs Administration and the Financial Analytical Office (FAÚ); at the European level, OLAF.

The origin of goods determines the customs duty rate and the application of trade policy measures. Goods from China may be subject to anti-dumping duty, while goods from Russia may be subject to a complete import ban.

If someone falsely declares the origin, they not only underpay customs duty, but may also breach the Czech Act on the Implementation of International Sanctions. This conflicts not only with customs rules, but also with AML requirements, if funds from illegal activity are used or if sanctioned entities are financing the transaction.

Czech authorities now expect importers not to be merely passive recipients of documents. Under the “Know Your Transaction” principle, you must have reasonable assurance that the declared origin reflects reality.

It is not only about what the supplier states on the invoice, but you must have supporting documentation proving that the goods do not originate from a sanctioned country or were not involved in customs fraud.

How transshipment works and why it is a problem

Transshipment, i.e., transport via third countries, is a legitimate logistics practice. However, in the context of luxury goods it is often misused to obscure the true origin of the goods. To change the non-preferential origin of goods, the last substantial, economically justified processing or working must take place in the relevant country.

This processing must result in a new product or represent an important stage of manufacture under Article 60 of the Union Customs Code. If Chinese components are merely assembled in Malaysia into a finished product and meet the rules for a change in tariff classification, it may be a lawful change of origin.

The problem arises when the goods are only repackaged, relabelled, or falsely declared. In luxury goods, we encounter high-risk schemes such as simple relabelling in bonded warehouses or insufficient processing of semi-finished products.

A common phenomenon is also complex chains with hidden ownership, where the goods pass through several jurisdictions and the ultimate beneficial owner is a person on a sanctions list. Without in-depth checks, the importer often will not discover this.

Practical issues include situations where the supplier refuses to disclose the factory address or the certificate of origin shows signs of forgery. A warning sign is also an illogical shipping route or a suspiciously low price.

ARROWS, a Prague-based law firm, encounters these issues in customs proceedings and FAÚ inspections. This is not merely a matter of checking invoices, but a comprehensive legal assessment of the entire supply chain under Czech and EU rules.

Obligations of luxury goods importers

When importing luxury goods, businesses are subject to obligations arising from several statutes under Czech law, in particular Act No. 253/2008 Coll. (the AML Act) and Act No. 69/2006 Coll., on the Implementation of International Sanctions.

Not every importer is automatically an obliged entity, but you typically become one when trading in cultural heritage items or when accepting high-value cash payments.

Regardless of the AML Act, you must comply with international sanctions applicable in the Czech Republic and the EU. As a matter of best practice, you should carry out customer identification and verification (KYC) and identify the beneficial owner. Screening against sanctions lists is essential, because certain goods may be subject to sectoral sanctions, such as a ban on importing steel or gold from Russia.

You must also monitor transactions and watch for red flags, such as sudden changes in volumes or payments from tax havens. All records of transactions and checks must be retained for the statutory period.

Risks and sanctions

Failure to comply with customs, tax and sanctions regulations can have severe consequences.

When the origin of goods becomes a problem

These examples illustrate mechanisms that occur in international trade and that supervisory authorities focus on. In cases of circumvention of anti-dumping duties on steel products, the goods are transported to Thailand, where only repackaging takes place.

The importer is then assessed additional duty and fined, because no substantial transformation took place in Thailand and the importer relied only on formal documents.

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Another example is “honey laundering”, where a duty-burdened commodity is smuggled through third countries and mixed with a local product. In the case of luxury watches, an importer may unknowingly purchase goods from a person on a sanctions list who merely routed the goods through the United Arab Emirates.

Our Czech legal team at ARROWS, a Prague-based law firm, can identify supply-chain risks early and implement preventive measures.

How to protect your company

Protecting your company requires a systematic approach, because compliance is not a one-off action. The first step is to set internal policies that define rules for supplier approval and goods checks.

For each supplier, carry out basic identification, sanctions screening, and verification of production capacity. Regularly update supplier information and monitor changes in sanctions lists, which evolve very dynamically.

Document all due diligence steps, because in the event of an inspection your audit trail is your primary evidence that you acted with due managerial care under Czech law. Purchasing and logistics staff must know what a “red flag” is. 

The difference between an error and intent

From a legal perspective, there is a fundamental difference between negligence and intent, even if the consequences in the form of additional customs duty may be similar. If you can demonstrate good faith and due care, your position is significantly stronger under the Czech legal system.

If you can demonstrate that you did everything to verify the accuracy of the information, this may be a mitigating factor when determining the sanction. However, if you ignored obvious warning signs or actively participated in the fraud, you may face criminal prosecution for tax evasion under Czech law. Czech law enforcement authorities will examine whether you could and should have known about the fraud.

Sanctions and Export Controls

While this article focuses on imports, export controls and import bans must also be mentioned. The EU prohibits the import of certain goods from Russia under the relevant Council Regulations.

If you import prohibited goods such as steel, timber or gold from Russia, you are breaching sanctions, even if the import is routed through a third country. The EU and the US also restrict exports of luxury goods to Russia and Belarus. If you sell luxury goods and suspect they will end up in Russia, you must not proceed with the transaction.

Our attorneys in Prague at ARROWS, a Prague-based law firm, conduct audits of contracts and transactions from a sanctions-compliance perspective.

Case study

A Czech furniture importer purchases designer armchairs from a supplier in Malaysia. The price is attractive and the documents claim the origin is Malaysia. However, the supplier purchased the armchairs in China and only stored and repackaged them in Malaysia.

The purchase funds were routed through non-transparent accounts in Hong Kong, while the company’s ultimate beneficial owner is linked to a person on a sanctions list.

During a subsequent inspection, the Czech customs authority finds that the declared Malaysian origin is false, assesses additional duty, and initiates administrative offence proceedings. In addition, FAÚ may investigate a breach of international sanctions in the Czech Republic. If the client had consulted us in advance, we would have recommended requesting evidence of manufacturing in Malaysia. If the issue had already arisen, we would represent the client in the customs proceedings.

Conclusion

The origin of luxury goods is a very risky area. Regulators today have advanced analytical tools and international information exchange at their disposal. The good news is that a methodical approach and a compliance program can protect you.

The attorneys at ARROWS, a Prague-based law firm, handle this issue for clients including importers, logistics companies, and e-shops. If you are dealing with the import of luxury goods into the Czech Republic, feel free to contact us at consultation@arws.cz.

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