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Japan-Update

Gold smugglers take a shine to Japan

Tax hike provides a lucrative opportunity as crimes become more sophisticated

Gold smugglers are striking it rich with budget airlines since these carriers often use the same aircraft for domestic and international flights.

TOKYO/BEIJING -- It was midway through Vanilla Air Flight JW172 on July 9 when one of the cabin attendants doing clean-up duty found something peculiar -- in the toilet toward the rear of the aircraft, a panel that was normally screwed tight to the wall was out of position. Peering inside the space the panel had covered, the attendant found three black pouches. Three more pouches were found stashed in a similar place in another toilet on the plane.

The six pouches, it was later revealed, contained several dozen kilograms of gold. Customs officials are investigating what is apparently a case of gold smuggling, one that speaks to the growing level of sophistication among smugglers exploiting budget carriers' tendency to use the same aircraft for both domestic and international flights.

Gold smuggling in Japan could rise even further with the introduction of another tax hike.   © Reuters

Such investigations have become almost routine for customs officials in the past two years. "We are seeing a diversification in [smuggling] methods with larger quantities [of gold]," the Ministry of Finance's Customs and Tariff Bureau said.

Japan is fast becoming the go-to place for gold smugglers. According to data from the Finance Ministry, fines or other punishments were handed down for 177 gold smuggling cases in the year through June 2015. To put that into context, 2012 and 2013 each saw less than 10 cases punished. The surge continued the following year, with the number of cases reaching an all-time high of 294 -- and this may be only the tip of the iceberg, as authorities believe there are numerous cases that have yet to come to light. 

Ease of transport and relatively stable prices have always made gold a popular target for smuggling. The sudden spike in cases stems from the increase in Japan's consumption tax in April 2014 to 8% from 5%. While the tax hike is a burden for ordinary citizens, it has proved a blessing for gold smugglers.

In Japan, consumption tax must be paid on gold when it is brought into the country. This amount is later tacked onto the price of the gold when it is sold, passing the cost of the tax onto the buyer. By circumventing the initial taxation process, smugglers can make a "profit" equal to the amount of that tax. Jacking up the consumption tax rate means bigger gains for smugglers.

The vast number of smuggling cases originate from other Asian countries. In 2016, Hong Kong was the point of embarkation in 135 cases, while in 88 cases it was South Korea, together making up 76%. Singapore followed with 27, Taiwan with 16, and Malaysia with 9.

The Vanilla Air flight on July 9 took off from Taiwan.

Level of sophistication

What surprised the authorities most about the Vanilla Air case was its sophistication in exploiting the budget carrier business model.

Budget airlines often maintain small fleets, using the same aircraft for domestic and international flights to maximize their rate of operation. Flight JW172 was scheduled to take off for Amami Airport, in Kagoshima Prefecture, after arriving at Kansai International Airport from Taiwan. Taking the gold off of the plane at Kansai International Airport would have meant going through customs with it and running the risk of being caught. Sneaking the gold off the plane at Amami Airport, from what would then be a domestic flight, would have allowed the smugglers to avoid carrying it through customs.

A spokeswoman for Vanilla Air said an internal investigation found several other flights with the same tampering in the toilets, and that the company has since rectified the problem.

"The method using budget carriers really surprised us," a member of the Customs and Tariff Bureau said. "There was also a case in Saga Prefecture that used a method often used by drug smugglers, delivering gold by sea. Whoever is behind these cases is really putting a lot of thought into the process."

Japanese authorities suspect "big organizations" with "big funds" are carrying out the smuggling operations, hiring different people for different phases of the act. Much of the blame falls on yakuza organized crime groups. A case in 2016 involved members related to the Inagawa-kai group who were prosecuted for smuggling 112kg of gold on their private jet from Macau. Finance Ministry statistics show that in 51% of the 294 cases that year, the perpetrators were Japanese.

Chinese involvement?

Some media outlets have also pointed the finger at China's wealthy. The argument goes that the rich, having lost confidence in the Chinese yuan and with investment in other assets becoming difficult, are turning to gold smuggling to move their wealth out of the country. They supposedly hire mules to carry the gold from China, as well as places like South Korea and Taiwan, into Japan, where the consumption tax increase has made it easy for them to pay off the carriers and bribe staff at Asian airports.

Although such claims are unsubstantiated, there are data and anecdotes that indicate they may not be wide off the mark. On the data side, statistics from World Gold Council show that while global demand for gold used in jewelry and as an investment dropped 13.3% on the year in the three months through June, China's demand rose 7.8%.

On the anecdote side, Chinese media outlet Shenyang Daily recently reported that 21 members of a gold smuggling gang had been discovered by customs officials in Shenyang, the largest city in Liaoning Province. Six were arrested on suspicion of trying to smuggle 45kg of gold out of China, while several other members were caught in the early morning of March 21 at Shenyang's Taoxian International Airport carrying 37kg of gold. One member was sent back to Shenyang from Japan after being caught trying to smuggle in 8kg of gold in January.

The authorities said the group usually bought gold from local jewelry stores and processed it into small nuggets that could be hidden inside clothing such as jeans or bras.

With Japan's consumption tax scheduled to rise again to 10% in 2019, authorities are bracing for a another surge in gold smuggling. In preparation, the government is moving to increase the fine for gold smuggling above the current maximum of 10 million yen ($91,000). The Customs and Tariff Bureau has also adopted a policy of going after the groups behind smuggling operations, rather than just catching and punishing the carriers, who are often used as scapegoats, with fines.

"We cannot confiscate a freely traded commodity like gold unless the case becomes a criminal case," the member of the bureau said. "That's why our aim is to uncover the extent of these schemes, to find the people behind them, prosecute them, and confiscate the gold, as well as slap fines on them. That will deal significant damage to the organizations behind the smuggling."

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