On October 17, 2020, the Export Control Law of the People’s Republic of China (hereinafter referred to as “the Export Control Law”) was promulgated. It will be effective on December 1, 2020.
The Export Control Law is not only an integration and adjustment of China’s current export control system, but also another powerful weapon for China to safeguard its national security and interests. Different from the existing “Unreliable Entity List System” which primarily sets restrictions on “people/entities”, the Export Control Law mainly takes prohibitive or restrictive measures against the transfer of controlled “items”. For both domestic and foreign enterprises engaging in import and export trade or related business, the export control compliance is more important than ever, and a complete review of companies’ current export control compliance system is recommended to be done immediately to reduce risks.
1. Changes to China’s Current Export Control System
Since the end of the 1990s, China has promulgated six export control administrative regulations and rules concerning controlled items related to nuclear, biological, chemical, missile and military products. The changes of the Export Control Law brought to the China’s current export control system are listed below:
(1) Expand the scope of controlled items. Technical information and data will be included as one of the controlled items. The enterprises having business over cross-border research or technology transfer may be affected.
(2) Expand the scope of the export activities to be controlled.
(3) Add new measures of temporary control, ban (and other reciprocal measures). These new measures are temporary sanctions which gives authorities discretion to decide on a case-by-case basis.
(4) Establish “control list for importers and end users” (hereinafter referred to as “Control List for IE”) and add the procedure of removal from it. This procedure gives enterprises in the list a second chance to comply with the laws and to be removed.
(5) Encourage enterprises to establish internal export control compliance system. Incentives or green channels to obtain permits/licenses will be granted by the government authorities as encouragement.
(6) Impose criminal penalties. Exporting items prohibited by the State, as well as exporting controlled items without permits will be investigated for criminal liability.
2. Key Points of PRC Export Control System
(1) Controlled Items
Controlled Items include:
dual-use items, military products, nuclear;
other goods, technologies, services and items related to the safeguarding of national security and interests;
technical information and data related to the controlled items.
Only the above-mentioned items have the risk of being prohibited or restricted to be exported. As a result of technical information and data being included into the controlled items by the Export Control Law, the enterprises having business over cross-border research or technology transfer may be affected. For example, a domestic enterprise provides services such as research, joint research or technology sales to a foreign enterprise may be deemed as technology exporting and thus being controlled. Of course, whether the items will be considered as one of the controlled items depends on the details of the Control List which will be further clarified and refined by regulations and rules in the future.
(2) Entities to be controlled
Entities to be controlled by the Export Control Law are listed below:
exporters which may export the items listed in the Control List, or the items temporarily controlled/banned;
service provider (such as agency, freight, delivery, customs declaration, third-party e-commerce transaction platforms and finance services, etc.) engaging in illegal acts related to export control;
importers which are listed in Control List for IE;
end-users which are listed in Control List for IE.
(3) Controlled Activities
The Export Control Law not only controls "general export" activities, but also includes "activities that are deemed as export", "re-export" and "special export" activities, including:
transfer of controlled items from the territory of PRC to overseas; (general export)
activities of providing controlled items by Chinese citizens, legal persons and organizations to foreign organizations and individuals; (activities that are deemed as export)
the transit, transshipment, through transport, or re-export of controlled items; (re-export)
the export of controlled items from areas under special supervision of the Customs, such as bonded zones and export processing zones, as well as bonded supervision areas such as export supervision warehouses and bonded logistics centers. (special export)
The indirect export activities such as "deemed export" and "re-export" being included in the scope of control expand the scope and forms of controlled activities. For example, the delivery of controlled items to foreign entities within the territory of China may also be controlled. Of course, the scope is still vague and needs to be further clarified and implemented by regulations and rules in the future.
(4) Control Measures
(a) Control Measures over the Items
listing in the Control List (in forms of list, directory or catalogue);
imposing temporary control measure (the temporary measure shall not exceed two years and can be removed, extended or included in the Control List);
imposing export ban (ban on export at all, or export to particular entities);
Other measures taken by the government to control the overall risk.
The risks evaluation of items to be export shall be included in a transaction in advance. Once the Control List, temporary control measures and export ban are published, it can be used as a reference for enterprises to predict the consequences of the transaction. However, there is still a chance to apply for permit when the items being listed in the control list or being imposed temporary control if the transaction is necessary.
(b) Control over Importers and End-users
Importers and end-users may be included in Control List for IE. Authorities will take the following factors into account before include enterprises into Control List for IE:
whether the importer/end-user break administrative requirement for purpose of use;
whether it is likely to endanger national security and interests; and
whether the controlled items are used for purpose of terrorism.
For importers and end-users which are listed in the Control List for IE, necessary measures will be taken, such as prohibiting or restricting the transaction of relevant controlled items, and ordering the importers and end-users to suspend the export of relevant controlled items. If there is a special need for trade, the exporters may file an application with the State's export control authorities on a case-by-case basis. The importers and end-users listed who are no longer in violation of the law can be removed from the list.
(c) Reciprocal Measures
The Export Control Law also stipulates that for countries and regions having abusive use of export control measures, China has the right to take reciprocal measures. The implementation of this provision in the future deserves enterprises’ attention, and to a certain extent, exporters in China with major business to the United States will have a high risk of being affected combined with the current Sino-US trade war.
(5) Consequences for Violation
Severe punishment, including criminal and administrative liabilities and extraterritorial effect, may be imposed for violating the Export Control Law.
(a) Criminal Liabilities
Violation of law may constitute a criminal offence for exporting controlled items, including the export of which is prohibited by the State, or exporting controlled items without permission.
(b) Administrative Liabilities
general administrative penalties, such as warning, ordering to cease the illegal act, confiscating illegal gains, imposing a fine, ordering to suspend the business for rectification and even revoking the qualification of engaging in the export of relevant controlled items;
the authorities may refuse to accept its application for export permit for five years；
prohibit the person directly in charge or in liability from engaging in the relevant export business activities for five years or for life;
include the violations into its credit record.
(c) Extraterritorial effect
The Export Control Law stipulates in principle the extraterritorial enforcement jurisdiction of the law, that is, if a foreign enterprise violates the Export Control Law in China (for example, involving criminal accomplices), or violates the regulations when re-exporting the controlled items purchased from China abroad, it may be investigated for relevant legal liabilities.
To sum up, export compliance can refer to the flow chart below:
Enterprises are suggested to take the following steps to make sure its compliance of China’s current export control system.
pay close attention to the publication of Control List, the Control List for IE, the Unreliable Entity List and other related documents, and conduct timely comparison and investigation;
pay attention to the promulgation of implemented laws, regulations and other documents. It is recommended to consult professionals and competent authorities before the transaction if necessary;
fully understand the information of the counterparties and the relevant control regulations of where counterparties locate before investment or trading, it is recommended to do proper due diligence, and consult lawyers or relevant professionals before the transaction to avoid major risks;
establish export compliance system. The system shall include regular assessment on export risk, sorting out the export items (classifying and coding the items according to risk levels), sorting out the trading partners and counterparties up and down the industry stream (planning alternatives in advance), applying for licenses in time, keeping transaction records for inquiry, adding the guarantee of counterparties and the commitment of end-users, establishing the review and tracking system of deals and actively strive for general licensing and other convenience.
We will continue to follow up and update our clients on the new PRC export control system. Please contact us if you have any questions and we are happy to provide consultation and compliance suggestions.