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Ref: CR EIC 9800/5/4/17 
       CR EIC 9800/5/4/2

14 November 2003

Dear Sirs,

Notice to Exporters

Series 1 (USA) No. 66/2003

Series 2 (EU) No. 51/2003

Series 3 (Countries other than USA & EU) No. 56/2003

Certificate of Origin Circular No. 22/2003

Certificate of Preference Circular No. 19/2003

Consignment Check, Production Check
and Factory Audit Check Requirements

I. Introduction

In order to uphold the integrity of the Textiles Export Control System, the Trade and Industry Department in conjunction with the Customs and Excise Department, currently conducts various forms of checks including consignment check, production check and factory audit check to verify the accuracy of material particulars declared on import licences ^{Note 1}/ export licences /certificates of origin/production notifications, and to verify the production capacity of a factory against its export performance. Officers of the Customs and Excise Department are empowered by law to enter the premises of the exporter/manufacturer/subcontractor and any other parties involved in the manufacture and/or export of textiles consignments, and to conduct inspections at any reasonable time. Inspection of goods may also take place at the container terminal, the airport, and other points of exit. Where necessary, sealed packages or containers are opened for inspection. Suspected malpractices are subject to full investigation.

2. This notice serves to remind exporters/manufacturers/subcontractors and any other concerned parties of the need to comply with consignment check, production check and factory audit check requirements. Notice to Exporters: Series 1 (USA) No. 57/02, Series 2 (EU) No. 42/02, Series 3 (Countries other than USA and EU) No. 42/02, Certificate of Origin Circular No. 9/02 cum Certificate of Preference Circular No. 5/02 all dated 10 December 2002 on Consignment Check, Production Check and Factory Audit Check Requirements are hereby superseded.

II. Compliance with Consignment Check Requirements

3. Consignment checks may, from time to time, be conducted by authorized officers of the Customs and Excise Department in relation to any goods which are the subject of a licence/certificate of origin or the subject of an application for a licence/certificate of origin. Consignment checks are also carried out on Free Quota Export Authorizations issued by the Department. Particulars declared in the subcontractor's declaration will also be checked. In the event of checking either at the time of processing of the application or after the issue of the licence/certificate of origin, the responsible person (including the proprietor/one of the partners/one of the directors) of all the parties concerned including the exporters, the manufacturers and the subcontractors must render all necessary assistance and co-operation to officers of the Customs and Excise Department in conducting the checks. In particular, they are required to comply with the following requirements:

1. the declared exporter/importer/manufacturer/subcontractor on a licence/certificate of origin application and any other parties involved must produce the relevant commercial and shipping documentation and manufacturing records as appropriate and must make the goods (if not already exported) available for inspection. Moreover, the party concerned should make available such sample if it is so required by officers of the Customs and Excise Department who are empowered by law to take, without payment but subject to the issue of an official receipt for it, a sample(s) of any article in respect of which any licence/certificate of origin may be issued for the purpose of examination and investigation. It is the duty of the declared exporter/manufacturer/subcontractor and any other relevant parties concerned to show that the goods have been or will be properly exported in accordance with the provisions of the Textiles Export Control System as stipulated in the quota allocation letter, and as may be notified from time to time per Notices to Exporters and Certificate of Origin Circulars issued by the Director-General of Trade and Industry; and to substantiate the origin of the textile products concerned. The documents or records mentioned above may include, but shall not necessarily be confined to, accurate and up-to-date records containing particulars of the following:

1. wages paid to employees including acknowledgements by employees of the receipt of their wages;

2. purchases, including the purchase invoices, and use of any materials and components used in the manufacture, processing or production of the textile article specified in the licence and certificate of origin and where applicable, the production notification and subcontractor's declaration (if any);

3. the manufacturing/work records of regular workers, out-workers and/or workers employed on an ad hoc basis;

4. the daily production of articles manufactured, processed or produced by the manufacturer and/or the subcontractor;

5. sales of articles manufactured, processed or produced by the manufacturer and/or the subcontractor or by another person for the manufacturer and/or the subcontractor and his stock of such articles;

6. any work consisting of manufacture, processing or production of any article being carried out for the manufacturer and/or the subcontractor by another person;

7. cash and bank receipts and payments;

8. any other relevant records and documents;

2. if the goods are not available for inspection at the first checking or where subsequent inspections are required, the exporter/manufacturer/subcontractor concerned must, whenever so required, and in accordance with such request, provide further opportunity for inspection before shipment, including, if necessary, the opportunity for inspection at the point of exit of the goods from Hong Kong. In this latter regard, the company/registered business will be expected to provide such export information (e.g. the name of the airline, shipping or transportation company, the name/address/telephone number of the forwarder/consolidator/container freight station, the vessel/flight/vehicle number and the departure date, etc.) as will sufficiently identify the location and/or movement of the goods for the purpose of facilitating customs checking at the point of exit; and

3. quota suppliers and transferors of temporary quotas should note that in case the declared exporter/manufacturer/subcontractor and any other parties involved cannot produce sufficient evidence to prove that the textile products covered by the export licence/certificate of origin/production notification are of Hong Kong origin, the shipment performance gained by the relevant licences would become ineligible for calculation of quota allocation. In this regard, all textile products (other than re-exports) exported under export licence Form 4, 5, 8 or 8a as the case may be must be of Hong Kong origin. Unless otherwise specified, goods claiming Hong Kong origin must have undergone principal processes of manufacture in Hong Kong. These are processes which permanently and substantially change the nature, shape, form or utility of the basic materials used in manufacture, as laid down by the Director-General of Trade and Industry in relevant Certificate of Origin Circulars. For the purpose of export to the USA, traders are requested to note that knit-to-shape panels of piece-knitted garments ^{Note 2} [other than sweaters in Categories 845(2) and 846(2)^{Note 3}] must be knitted in Hong Kong. Piece-knitted garments [other than sweaters in Categories 845(2) and 846(2)] made from knit-to-shape panels knitted in Hong Kong are deemed to be products of Hong Kong origin. Please refer to the relevant Notice to Exporters: Series 1 (USA) on Principles of Quota Allocation and Control Arrangements for details regarding export of piece-knitted garments to the USA.

III. Compliance with Production Check Requirements

4. Manufacturers/subcontractors lodging production notifications are reminded that production checks may, from time to time, be conducted by authorized officers of the Customs and Excise Department to verify the information declared on the production notifications. In the event of a production check, manufacturers/subcontractors should observe certain production check requirements including, but not necessarily confined to, the following:

1. make available and/or provide the component parts, including those having undergone subsidiary processes or with minor accessories sewn outside Hong Kong, and the assembled garments declared on the production notification for inspection by officers of the Customs and Excise Department;

2. notify officers of the Customs and Excise Department the exact date of the commencement of assembly work to facilitate a re-inspection in cases where the assembly of parts into garments as declared on the production notification has not commenced at the time of inspection by officers of the Customs and Excise Department;

3. provide documentary evidence (including books and records as required by the Director-General of Trade and Industry, the primary records and documents of the intake and disposal of component parts, primary production records and the records indicating payments made to workers, out-workers or subcontractors) to show the goods have been manufactured in the manner as declared on the production notifications; and

4. make available such sample if it is so required by officers of the Customs and Excise Department who are empowered by law to take, without payment but subject to the issue of an official receipt for it, a sample(s) of any article in respect of which any production notification may be validated or any production notification has been lodged for the purpose of examination and investigation.

For details of the list of component parts of products allowable to be done outside Hong Kong, please refer to relevant Certificate of Origin Circulars.

IV. Compliance with Factory Audit Check Requirements

5. Factory audit check is a combination of consignment check, factory inspection and production capacity verification where all licences/certificates of origin and/or licence/certificate of origin applications taken out/made by a manufacturer in respect of one or more markets during a specific period will be verified against the relevant manufacturing records and export documentation to ensure the accuracy of the material particulars declared on the certificates of origin and/or licences. At the same time, all particulars declared on the application for factory registration and the production capacity information supplied by the manufacturer for factory registration purpose will also be verified. In addition, production check will be conducted to verify the factory's production capacity against its export performance over a specified period of time.

6. In the event of a factory audit check, the responsible person of the factory concerned (including the proprietor/one of the partners/one of the directors) will be required to complete a questionnaire within a specified period of time and all the parties concerned including the exporter, the manufacturer, and the subcontractor are required to comply with all the requirements set out in paragraph 3 (a) to (c) above. The factory concerned should also furnish the relevant records and provide all necessary co-operation to officers of the Customs and Excise Department in conducting the production check for verification of its declared production capacity.

V. Information on the Date by which the Goods would be Available for Inspection

7. Applicants for export licence or certificate of origin are also reminded to declare on an application:

1. the relevant vessel/flight/vehicle number if it is known at the time of application; or if it is not yet known, the words "by air", "by sea", "by road" or "by rail" (as the case may be) should be inserted to indicate the mode of shipment of the goods; and

2. the departure date, i.e. by which time the goods will be ready for physical inspection by officers of the Customs and Excise Department at the point of exit.

8. For export licences Form 4, shipping, airline and transportation companies are requested to note that they are required to insert the name of the carrier, the vessel/flight/vehicle number (if not yet inserted by the exporter) and the actual date of departure on the TRIPLICATE copy before they are returned to the Trade and Industry Department together with the cargo manifests. For Restrained Textiles Export Licences (RTELs), the carrier should pass the related certified copy or certified extract of the manifest quoting the RTEL numbers to the Department for shipment verification. No paper copy of the RTEL is required to be returned to the Department.

VI. Important Notes

9. Compliance of consignment check, production check and factory audit check requirements is a condition of licence, certificate of origin, production notification, Textiles Controls Registration as well as Factory Registration. Quota holders are also reminded that the utilization of quota, including any transfer out of quota, may be conditional upon the fulfilment of the factory audit check requirements to the satisfaction of the Director-General of Trade and Industry.

10. Failure to comply with any of the consignment check, production check or factory audit check requirements or failure to render all necessary assistance and co-operation to officers of the Customs and Excise Department in conducting the checks including the provision of sample(s) of any article for the retention of officers of the Customs and Excise Department for examination and inspection purposes may be liable to legal and/or administrative actions including suspension of all licensing facilities including transfer facilities, and all certification facilities including those relating to production notification. Furthermore, the Textiles Controls Registration, Factory Registration, services provided under the Local Subcontracting Arrangement and Outward Processing Arrangement as well as other facilities provided under the Textiles Export Control System for the parties concerned will also be suspended. The Director-General of Trade and Industry may reject or refuse to validate the relevant licence application/certificate of origin application/production notification as appropriate; or in the event that a licence/certificate of origin/production notification has already been issued/validated, he may cancel, suspend and/or revoke the relevant licence/certificate of origin/production notification, and may discount the shipment performance of all the export licences taken out by the parties concerned during a specific period including those issued before 2004 for the purpose of quota allocation. In this eventuality, the Department will not accept any responsibility that may arise from the rejection of the application or the revocation of the approved/validated licence/certificate of origin/production notification concerned. Traders who wish to dispute a decision made under the Import and Export Ordinance may lodge an appeal under Section 6 of the Ordinance.

11. Applicants are reminded that if a particular application is selected for pre-issue check, it will normally take a relatively longer time for processing that application. Traders are therefore requested to bear this in mind in drawing up their shipment schedules. Moreover, late completion of requisite checking will unavoidably delay the processing of the applications concerned. Unless and until the pre-issue check (including the checking of supporting documents and physical inspection of the goods) has been completed, the applications concerned will not be processed for approval.

12. Exporters/manufacturers/subcontractors are further requested to note that factory audit checks are very detailed checks on the operation of factories and may cover a substantial number of export licences and/or certificates of origin. The checks may necessitate repeated visits to the factory concerned by officers of the Customs and Excise Department. Exporters/manufacturers/subcontractors are expected to provide assistance and co-operation to the officers of the Customs and Excise Department throughout the entire period of the checks. However, every effort will be made to minimize the inconvenience or disruption that may be caused to the factory.

VII. Warning

13. The Trade and Industry Department works closely with the Customs and Excise Department, through checks and inspections, to ensure compliance with the provisions of the Textiles Export Control System. The Department takes a serious view of traders who breach any of the provisions of the Textiles Export Control System. A company/registered business which commits an offence under the Import and Export Ordinance is liable upon conviction to a maximum penalty of a fine of HK$500,000 and two years' imprisonment.

14. Moreover, it is the Department's policy to take administrative actions against exporters/importers/manufacturers/subcontractors and any other parties concerned in cases of malpractice relating to the importation, exportation, re-exportation and/or transshipment of textiles products. Parties infringing the textiles origin rules, and/or in breach of any of the provisions of the Textiles Export Control System may be subject to administrative actions independent and irrespective of any prosecution action which may be instituted against them. The Department also reserves the right to take administrative actions where, in its view, there is evidence which shows a company/registered business' involvement in any form of malpractice including falsifying of particulars affecting any licence or document in support thereof.

15. For the purpose of upholding Hong Kong's international reputation among her trading partners and safeguarding the integrity of the Textiles Export Control System, administrative actions may be taken against cases of transshipment fraud or other textiles related malpractice irrespective of, among others, the following circumstances:

1. whether the companies/registered businesses concerned are engaged in the export of restrained textiles or are parties to the export licence(s), or whether they are the quota suppliers for the shipments concerned;

2. whether the shipment has been effected;

3. whether Hong Kong quotas have been misused;

4. whether free quota has been allocated to, accepted or utilized by the companies/registered businesses; or

5. whether import/export/re-export licences/notifications, certificates of origin and/or production notifications have been applied for/lodged, amended, cancelled or withdrawn.

16. These administrative actions may involve, but shall not necessarily be confined to, any or all of the following: suspension or cancellation of the Textiles Controls Registration (TCR) of the company/registered business concerned and/or refusal to register the company/registered business concerned for TCR purpose and retrieval of all the quotas held by the company/registered business concerned; suspension and revocation of any exemption and/or registration granted under the Textiles Trader Registration Scheme; permanent forfeiture or surrender of quota; withdrawal of the balance of quota remaining unlicensed at that time; disqualification from receiving future allocations of quota; discounting of shipment performance gained by the licence(s) for the purpose of quota allocation; debarment from all facilities of the Textiles Export Control System; debarment from all licensing facilities including transfer facilities and all certification facilities including those relating to production notification; debarment from pairing-up for licensing facilities; debarment from participation in textiles export control schemes including free quota schemes and/or Year-End Special Shipment Scheme; rejection of a licence/certificate of origin application or refusal to validate production notification; and cancellation, suspension and/or revocation of a licence/certificate of origin/production notification.

17. With a view to strengthening the effectiveness in combating origin malpractice, the Department may discount, for the purpose of quota allocation, the shipment performance of the consignment involved in the textiles origin infringement cases in respect of textiles export to restrained markets. In addition, the Department may take the following actions:

1. permanent surrender of quota involved in the textiles origin infringement(s);

2. party(ies) who have been convicted due to infringement of textiles origin rules in respect of textiles export to restrained markets may, for each offence, be debarred from pairing up with the other parties involved in the same case to obtain export licences and free quotas in all restrained markets for a period of 12 months as specified by the Director-General of Trade and Industry; and

3. if the party in breach of the textiles origin rules has been so convicted on more than one occasion on or after 4 December 1998 and such infringements occurred within a 12-month period, its applications (if any) for all licensing facilities including transfer facilities and participation in the various control schemes in respect of all restrained markets, and all certification facilities including facilities relating to production notification may be rejected for a period of 6 months as specified by the Director-General of Trade and Industry.

For details of these measures, please refer to Notice to Exporters: Series 1 (USA) No. 20/99, Series 2 (EU) No. 9/99 and Series 3 (Countries other than USA & EU) No. 8/99 dated 23 March 1999.

18. Quota suppliers and transferors of temporary quota (including swing transfer of quota) should note that the textiles products exported or to be exported to restrained markets under their Hong Kong quotas must be of Hong Kong origin and such export must be made in accordance with the provisions of the Textiles Export Control System and any other requirements laid down by the Director-General of Trade and Industry governing the export of textiles. Otherwise, the Director-General may decide to discount the shipment performance gained by the licence(s) concerned for the purpose of quota allocation. Under such circumstances, the utilization percentages of both the quota supplier's and the transferor's quota holdings and their quota allocation may be affected.

19. Quota suppliers and transferors of temporary quota should further note that discounting of shipment performance mentioned in paragraph 18 above could render them liable to a substantial reduction of their quota holding if discounting of performance of the licence(s) concerned results in less than 98% utilization of their quota holding. Furthermore, even if quota suppliers and transferors of temporary quota are not involved in or aware of the textiles malpractice, the Director-General of Trade and Industry may still discount the shipment performance concerned where he considers appropriate. Quota suppliers and transferors of temporary quota are therefore reminded to bear this in mind when using or transferring quota.

VIII. Enquiries

20. Should you require further information on the content of this circular, please contact the following office/officers :

Yours faithfully,

(Miss Christina Ho)

for Director-General of Trade and Industry

To: All shipping, airline and transportation companies (to note paragraph 8 above)

^{Note 1} Import licences include those applied under the Special Export and Import Licensing (Textiles) Scheme for the USA market.

^{Note 2} Piece-knitted garments are garments manufactured from knit-to-shape panels which are knitted to shape ready for assembly without further manufacturing process other than minor trimming and/or cutting of the collar to shape.  Knit-to-shape panels are sometimes made by a continuous process and come off the machine joined together.

^{Note 3} Category 845(2) covers sweaters of non-cotton vegetable fibre made from knit-to-shape component parts knitted elsewhere.  Category 846(2) covers sweaters of silk blend made from knit-to-shape component parts knitted elsewhere.