Corporate Officers Cannot Hide Behind Corporate Veil in Customs Fraud Cases

The Supreme Court has reaffirmed that corporate officers cannot hide behind the corporate veil to escape criminal liability for customs fraud. In Fernandez v. People (G.R. No. 249606, July 6, 2022), the Court upheld the conviction of four corporate officers of Kingson Trading International Corporation for violating the Tariff and Customs Code through the misdeclaration, misclassification, and undervaluation of imported steel products.

The case demonstrates how Philippine courts treat corporate officers who knowingly participate in, or negligently allow, fraudulent importation practices. It also clarifies the evidentiary standards for establishing fraud in customs cases.

The Facts of the Case

In May 2006, a shipment of 2,406 bundles of steel products arrived at the Port of Manila from China. Kingson Trading International Corporation, through its corporate officers, filed an Import Entry and Internal Revenue Declaration (IEIRD) declaring the shipment as "steel products (SCM 440 round bar)" valued at US$692,254.00, with a tariff rate of 1%.

Upon investigation, the Bureau of Customs discovered significant discrepancies. The counterpart export documents obtained from Chinese authorities through the Philippine Embassy showed that the shipment actually consisted of reinforced steel bars (rebars) valued at US$1,281,271.86, which should have been classified under a different tariff heading carrying a 7% duty rate.

The corporate officers charged were the company's President, Vice-President, Treasurer, and Corporate Secretary. The Court of Tax Appeals convicted all four, and the Supreme Court affirmed their conviction.

The Elements of Customs Fraud

Under Section 3602 of the Tariff and Customs Code, the crime of fraudulent practice against customs revenue requires three elements: (1) there must be an entry of imported articles; (2) the entry was made through false or fraudulent documents or practices; and (3) there was intent to evade payment of taxes.

The Court emphasized that the fraud contemplated by law is intentional fraud—deception willfully and deliberately resorted to in order to cause financial loss to another. This includes fraudulent concealment, which presupposes a duty to disclose the truth and a failure to do so when the opportunity to speak was present.

Prima Facie Evidence of Fraud

Section 2503 of the Tariff and Customs Code provides a crucial evidentiary rule: when the undervaluation or misdeclaration exceeds 30% between the declared value and the actual value, this constitutes prima facie evidence of fraud.

In this case, the declared value of US$692,254.00 was substantially lower than the actual value of US$1,281,271.86—a discrepancy far exceeding the 30% threshold. This shifted the burden of evidence to the accused to explain the discrepancy, which they failed to do.

Corporate Officer Liability

The Court rejected the petitioners' argument that they should not be personally liable because the corporation has a separate legal personality. While a corporation is indeed separate from its officers and directors, corporate officers may be individually held criminally liable when they actively participated in, or had the power to prevent, the wrongful act.

The Court noted that the petitioners, by virtue of their positions, had knowledge of the importation transaction. The amount involved was too substantial for responsible corporate officers to claim ignorance. Notably, the Corporate Secretary signed the IEIRD containing the fraudulent information, with a certification that the information was true and correct to the best of her knowledge.

The "Negative Pregnant" Doctrine

The Court also applied an interesting evidentiary principle. The petitioners' denial that they committed fraud—insisting that they merely relied on documents from the foreign shipper—was considered a "negative pregnant," a form of denial that carries an affirmation of some fact favorable to the prosecution. Their denial implied they were personally aware of the details of the shipment and the contents of the importation documents.

Practical Takeaways

• Corporate officers face personal criminal liability for customs fraud committed through the corporation. The corporate veil does not protect officers who knowingly participate in, or negligently allow, fraudulent importation practices.

• The 30% rule is critical. An undervaluation or misdeclaration exceeding 30% between declared and actual value creates prima facie evidence of fraud, shifting the burden to the accused to explain the discrepancy.

• Documentation matters. Importers should verify the authenticity and accuracy of all shipping documents, including those from foreign suppliers. Failure to secure certifications or explanations from suppliers when discrepancies arise can be fatal to a defense.

• Knowledge is presumed for responsible officers. Officers in positions of responsibility—President, Vice-President, Treasurer, Corporate Secretary—are expected to know about significant transactions of the corporation. Claims of ignorance in high-value transactions are unlikely to succeed.

• Good faith claims require concrete evidence. Mere assertions of reliance on documents from foreign suppliers are insufficient. Officers must show affirmative steps taken to verify the accuracy of importation documents.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.