Turning the 'Hong Won-shik Risk' Around... Namyang Dairy Products Fights Customs Lawsuit Over Proxy Powdered Milk Imports

Namyang Dairy Products' Proxy Import Case Involving Foreign-Made Powdered Milk
Administrative Lawsuit Over KRW 18.8 Billion Customs Duty
Lost First Trial, Appealed the Decision
Namyang: "Part of the Compliance System Implementation"

It has been confirmed that Namyang Dairy Products is engaged in a legal dispute with customs authorities over KRW 18 billion in customs duties that the company paid after being caught importing foreign-made powdered milk under borrowed names during the tenure of former Chairman Hong Won-shik.

According to a compilation of coverage by The Asia Business Daily on September 16, the Administrative Division 3 of the Seoul High Court held the first hearing of the appellate trial on September 3 for the 'lawsuit seeking cancellation of customs and other taxes' filed by Namyang Dairy Products against the head of Seoul Customs.

Previously, between 2017 and 2022, Namyang Dairy Products imported approximately 235 tons of Dutch goat whole milk powder valued at KRW 18 billion. The company used three front companies as proxy importers to obtain duty-free treatment. Under the Free Trade Agreement (FTA) between Korea and the European Union (EU), a certain quantity of powdered milk may be imported duty-free. To do so, companies must participate in and win the FTA import quota auction and then obtain a recommendation letter from the Korea Agro-Fisheries & Food Trade Corporation (aT), which must be submitted to customs authorities.

Namyang Dairy Products used three proxy companies to participate in the import quota auction and win bids, securing allocations of duty-free quotas. The company then obtained import recommendation letters in the names of these proxy companies, allowing Namyang Dairy Products to receive a customs exemption of KRW 11.3 billion.

Upon discovering this, Seoul Customs retroactively applied the basic powdered milk tariff rate of 172%, imposing KRW 11.3 billion in customs duties as well as an additional KRW 7.5 billion in penalty taxes for false reporting, totaling KRW 18.8 billion in customs duties for Namyang Dairy Products.

This incident, which occurred during the management of the Hong family, led to Namyang Dairy Products receiving a confirmed fine of KRW 15 million from the Supreme Court. However, in January 2024, Hahn & Company, having taken over control from the Hong family, filed a lawsuit in February of the previous year to challenge the legitimacy of the customs action. Namyang Dairy Products argues that Article 8, Paragraph 1 of the Special Act on FTA Customs defines 'the person eligible for preferential customs rates' as the 'importer,' pointing out that Namyang Dairy Products was listed as the importer on the recommendation letter submitted to Seoul Customs.

Yonhap News

Additionally, the company argues that it used proxy companies in the import quota auctions and subsequent winning bids out of concern that direct participation would provoke strong resistance from the domestic dairy industry. Therefore, it claims there was no intent to evade taxes and that the penalty tax should not apply.

However, the court of first instance ruled in favor of Seoul Customs. The 8th Administrative Division of the Seoul Administrative Court (Presiding Judge Yang Soon-joo) ruled against the plaintiff, Namyang Dairy Products, in the 'lawsuit seeking cancellation of imposition of customs and other taxes' in February of this year.

The court stated, "Namyang Dairy Products created the appearance of transferring the powdered milk to proxy companies, then submitted recommendation letters in the names of the proxy companies and applied for the preferential tariff rate as if the proxy companies were the actual importers. As Namyang Dairy Products itself was not allocated a customs quota, it was ineligible for the preferential tariff rate, and thus the customs authorities' assessment was legitimate."

It further stated, "If it is later found that goods receiving the preferential tariff rate failed to meet the eligibility requirements, the outstanding taxes must be collected along with a penalty tax in accordance with Article 36 of the Special Act on FTA Customs."

This lawsuit was initiated as part of efforts by Hahn & Company to restore the brand image of Namyang Dairy Products through managerial normalization following the acquisition, after the brand had been damaged by various scandals. In August 2024, Namyang Dairy Products filed criminal charges against former Chairman Hong and others, accusing them of embezzlement and breach of trust for alleged misappropriation of company funds and causing financial loss. More recently, the company also filed additional charges against former Namyang Dairy Products advisor and Hong's wife, Lee Unkyoung, for breach of trust, claiming she diverted over KRW 800 million in company funds for charitable donations under her own name.

A Namyang Dairy Products official stated, "This incident occurred during the previous management regime. We are following procedures to dispute the tax assessment with the goal of correcting parts that were not sufficiently explained during the implementation of our compliance system."

This content was produced with the assistance of AI translation services.