The Problem of Illicit Use of Diesel Oil
(ACE Paper 36/98)
The purpose of this paper is to brief Members on the causes and impact of illicit use of diesel oil, and the law enforcement efforts made by the Customs & Excise Department (C&ED).
TYPES OF ILLICIT DIESEL OIL
There are currently three types of diesel oil being illegally used in Hong Kong, namely :
- Light Diesel Oil
- Marked Oil
- Detreated Oil
The following paragraphs briefly describe these types of illicit fuel and the channels through which they come into the black market.
Light Diesel Oil
Light diesel oil (LDO) is a kind of hydrocarbon oil commonly known as '油渣' in Chinese. It is colourless and easily available at legitimate filling stations. Government duty is imposed on LDO for use as vehicle fuel. Following the latest revision on 23 June 1998, the current duty rate on one litre of LDO is $2.00 and the pump price at local filling stations is $5.69 per litre.
Illegally imported LDO is duty-not-paid and is therefore referred to as 'dutiable LDO'. Most of the dutiable LDO is smuggled into Hong Kong from the Mainland by the sea route. Chinese trading vessels and fishing boats are commonly used for such smuggling activity. Some dutiable LDO is brought in through the land route by cross-border vehicles.
Local oil companies usually obtain diesel oil from overseas sources, such as Singapore. On occasions, they will obtain supply from Mainland suppliers. In such case, the Mainland fuel will have to meet all environmental requirements as usual supplies from other sources. For practical reasons, cross-border vehicles are allowed to bring in a small quantity of LDO in their fuel tanks as a duty free concession. It may run up to a maximum of 300 litres depending on the type of vehicle involved.
Marked oil, also known as 'industrial diesel oil', is LDO to which a marker and a colouring substance have been added to distinguish it from ordinary LDO. Being free from duty, it is only intended for industrial use, such as in restaurants, dyeing factories and construction sites, or as fuel for fishing vessels. It is not permitted to be used as fuel in road vehicles and pleasure vessels. Marked oil can be obtained from legitimate oil suppliers without restrictions in Hong Kong and is sometimes found being smuggled to the Mainland.
Apart from smuggled LDO, illegal traders use detreated oil as a substitute to fill the large demand for illicit diesel in the black market. They use chemical methods to remove the red colour from marked oil and make it look like ordinary LDO. This is usually done by adding concentrated sulphuric acid and caustic soda to the marked oil or by filtering with industrial activated carbon. Recently silica gel has also been used as a decolourizing substance. The decolourized diesel oil is called detreated oil.
CAUSES OF THE ABUSE OF DIESEL OIL
The illicit use of LDO is a long-standing problem which has caused the utmost concern of the department. The following are the major causes leading to the present situation :
(1) substantial savings from using illicit fuel;
(2) lucrative profits from selling illicit fuel;
(3) easy availability of dutiable LDO and marked oil; and
(4) light penalties on diesel oil offenders.
Substantial savings from using illegal fuel
At present, the price of legitimate LDO from filling stations is $5.69 per litre, including the duty levied by Government. However, illicit diesel is being sold in the black market currently at a much cheaper price of about $3.5 - $4 per litre. This gives a saving of about $1.7 - $2.2 per litre, which may simply become irresistible to drivers, tempting more to take the risk of using the illegal fuel.
Lucrative profit from selling illicit diesel oil
Due to the low cost of supply and the large demand, selling illicit diesel oil is a lucrative business. As a rough estimate, a medium-sized illegal filling station can generate a profit of around $8,000 to $11,000 from selling an average of 6,000 litres of illicit fuel a day. This basically accounts for the large number of illegal filling stations in operation throughout the territory.
Easy availability of dutiable LDO and marked oil
Marked oil is easily obtainable from legitimate oil depots. There is no legal restriction on the possession, sale and movement of marked oil unless it is put into the fuel tank of a motor vehicle or a pleasure vessel. The lax control in this area in effect provides an easy supply of marked oil for illegal detreating plant. At the retail level, the large number of illegal filling stations spreading over the territory are providing easy access for drivers to use illicit fuel.
The maximum penalty for dutiable LDO offences is a fine of $1,000,000 and imprisonment for 2 years while marked oil offences carry a maximum penalty of a fine of $200,000 and imprisonment for 2 years. Nonetheless, statistics once revealed that the usual fine for a driver using illegal fuel ranged from $1,000-$2,000 while for cases involving bulk seizure, the penalty was only around $10,000-$20,000. Only on rare occasions, custodial sentences were imposed.
From the enforcement's point of view, the generally light penalties imposed on offenders were manifestly inadequate to reflect the prevalent situation and could hardly pose sufficient deterrent effect. For that, the Customs and Excise Department has tried successfully on 2 occasions - one in March 97 and the other in March 98 - to organise a presentation and field visit for magistrates to enable the judiciary to have a better understanding of the problem of illicit use of diesel oil. Higher penalties have since been recorded as can be reflected by the increase in the average fine from $4,300 in 1997 to $5,600 this year and the increased number of custodial sentences meted out by courts.
Apart from the evasion of duties, illicit use of diesel oil can also cause serious problems to the environment in the following ways :
- fire hazard to the public;
- other impacts on the community;
Diesel oil is classified as Category 5 goods under the Dangerous Goods Ordinance. It is inflammable and catches fire easily if stored improperly. There have been incidents where fire and explosions occur in connection with storage of illicit diesel oil causing deaths and serious damage. Illegal filling stations set up in urban residential areas are therefore a serious threat to life and property, which requires urgent enforcement action.
When substantial quantities of diesel oil are found in C&ED's raids, the Fire Services Department will be informed for taking corresponding action under their jurisdiction. Under the Dangerous Goods Ordinance, a licence from the Fire Services Department is required for the storage of diesel oil over the exempted quantity of 2,500 litres.
Marked oil usually has a sulphur content of around 0.35%, which is much higher than the 0.05% limit currently set for legitimate automotive diesel oil. Smuggled LDO is also found to have a sulphur content similar to marked oil. As such, the use of marked oil and smuggled LDO by road vehicles will emit more sulphur dioxide and respirable suspended particulate (RSP), both being an air pollutant which is harmful to health.
Detreated oil may also contain other harmful chemicals left over from the decolourizing process. The use of detreated oil as automotive fuel may therefore cause not only air pollution but also wear and tear problems to vehicle engines.
To fight against illicit use of diesel oil, the C&ED has been making relentless efforts in maintaining enforcement at all levels against the illegal activities. Two stringent measures have been introduced to increase the deterrent effect on users. From December 1996, any vehicle, other than a public vehicle, found using illegal fuel for the second time will be detained for forfeiture. In addition, with effect from 1 January 1997, drivers will have to bear criminal record if charged and convicted of any offence relating to the use of illegal fuel.
These additional measures resulted in a 78% drop in marked oil cases from 1996 to 1997. The hit ratio on vehicles checked for using marked oil also dropped to about 2% from the previous level of 20%. The black market then responded by a shift of demand to smuggled LDO and detreated diesel, which have now become the focus of our enforcement attention.
To enhance the gathering of intelligence, the C&ED has in cooperation with the oil industry introduced a reward scheme for information that leads to the seizure of illicit diesel oil. The scheme was launched in April 1996 with an initial contribution of $1 million from the five local oil companies. Up to June 1998, a total of 146 pieces of information have been received under the scheme resulting in the seizure of 920,243 litres of illicit LDO from cases involving illegal imports, detreated oil plants and storage and distribution centres.
Latest enforcement action also led to the seizure of 240,000 litres of LDO in July, which had been released to an oil barge for export to Mainland but was subsequently found being conveyed back to land illegally for sale in the black market. While this is an upward trend for smuggling LDO, increased vigilance is being mounted at sea to intercept more oil barges for routine and special checking.
Following the reduction of duty rate on LDO from $2.89 to $2.00 per litre as from 23 June 1998, C&ED anticipates that some of the illicit diesel oil users may shift back to using legitimate LDO. However, it is difficult to estimate the full effect of the measure on the illicit diesel oil smuggling trend at this stage and C&ED will closely monitor the situation.
The C&ED is determined to fight against the use of illicit diesel oil. Apart from stepping up enforcement, it will continue to review its enforcement strategies and develop new measures for effective control of the situation.
Customs and Excise Department