With the escalation of Sino-US trade war over the last year, the United States unilaterally used its unique “entity list” system to impose sanctions on Chinese enterprises in the list. As one of the counter-measures, on September 19, 2020, the Ministry of Commerce formulated and promulgated the Provisions on the Unreliable Entities List (hereinafter referred to as the “Provision”), which provides a legal basis for China to take corresponding measures in the future. However, the current Chinese “unreliable entity list” (hereinafter referred to as the “List”) system is quite different from the US entity list system. The Provision is not discriminatory to different entities in different countries and is only a general guidance on regulatory objects, regulatory actions, investigation procedures, rectification periods, legal consequences, and relief mechanisms. Although detailed implementation regulations for the Provision has not yet been issued, companies should keep track of the progress of the Provision and take precautionary measures if necessary.

1.      Entities that may be included in the List

The Provision regulates foreign entities, including enterprises, other organizations, or individuals of a foreign country. 

The Chinese government will consider the following factors when making a decision on whether to include the relevant foreign entity in the “unreliable entity list”:

●  the degree of danger to national sovereignty, security or development interests of China;

●  the degree of damage to the legitimate rights and interests of enterprises, other organizations, or individuals of China;

●  whether being in compliance with internationally accepted economic and trade rules;

●  other factors that shall be considered.

The implementation regulation for the “unreliable entities list” system and the initial version of the List may be published soon.

2.      Actions of Entities that may be included in the List

The Provision mainly regulate the following two kind of actions of foreign entities:

●  endangering national sovereignty, security or development interests of China;

●  suspending normal transactions with an enterprise, organization, or individual China or applying discriminatory measures against an enterprise, organization, or individual in China, which violate normal market transaction principles the legitimate rights and interests of the enterprise, organization, or individual China.

The scope and definitions of these two types of actions are vague. It will be further refined by detailed rules in the future.

3.      Punishment and Legal Risks

(1)  Impact of being included in the List

In accordance with the Provision, the relevant governmental authorities impose the following sanctions on foreign entities placed within the “unreliable entities list”  including:

●  restricting or prohibiting the foreign entity from engaging in China-related import or export activities;

●  restricting or prohibiting the foreign entity from investing in China;

●  restricting or prohibiting the foreign entity’s relevant personnel or means of transportation from entering into China;

●  restricting or revoking the relevant personnel’s work permit, status of stay or residence in China;

●  imposing a fine of the corresponding amount according to the severity of the circumstances;

●  other necessary measures.

Once included in the List, the economic activities of foreign entities in China will be seriously affected. However, inclusion in the List does not mean the entities will be sanctioned immediately. The Provision also sets up an investigation procedure and removal mechanism under which foreign entities are entitled to make explanations and appeal. Foreign entities entering this stage are advised to seek professional legal advice to enter investigation and ratification proceedings in order to avoid further losses.

(2)  The Risks of Transactions with Entities in the List

The Provision does not specify the legal consequences for third parties entering into transactions with foreign entities in the “unreliable entity list” but such consequences are to be further clarified by future implemention laws and regulations. Companies who are considering entering into transactions with foreign entities on the List, or their related parties, are advised to conduct full due diligence before entering into contractual commitments in order to avoid potential future sanctions.

In addition, in accordance with the Provision, Chinese enterprises, organizations or individuals who have compelling reasons for trading with foreign entities in the List for special reasons can apply for permission on a case-by-case basis.

(3)  Our Advice

At present, the Provision is only a general guidance with a lot of uncertainties. For foreign entities and their subsidiaries in China, we advise as follows :

●  pay close attention to the implementation of the “unreliable entities list” system, establish an effective risk prevention mechanism, and ensure that the daily operation of enterprises conforms to the latest laws and regulations in China;

●  strictly review customers and suppliers involved in sensitive areas;

●  all the discrimination policies involving Chinese market, Chinese customers, Chinese suppliers and Chinese partners should be strictly reviewed and discussed in advance;

●  all public statements, announcements and sensitive expression should be reviewed by Chinese lawyers and relevant experts in advance;

●  attention should be paid not only to the provision of China’s official laws and regulations, but also to the opinions and positions of the Chinese government and relevant departments;

●  once included in the List, the entity should make explanations and appeal proactively in accordance with the procedures prescribed by law, and maintain good communication with the Chinese government to obtain the chance to be removed from the List as soon as possible;

●  for special reasons, Chinese companies that need to trade with foreign entities on the List shall apply for permission on a case-by-case basis in accordance with the relevant provision.

We will continue to follow up and update our customers with in-depth analysis of the List.