China Enacts Export Control Law Following Its Announcement of the Unreliable Entities List

On December 1, 2020, China's Export Control Law ("ECL") took effect.¹ Prior to the ECL, China's export control regime was scattered across multiple laws, regulations, and guidelines enforced by an array of government ministries.  The ECL changes this status quo by creating a comprehensive and unified framework for export control.  The ECL follows China's May 2019 announcement of the Provisions on the List of Unreliable Entities ("UEL") under which blacklisted entities can be restricted or prevented from trading with China.²

This client alert lays out the major provisions of the ECL and the UEL and discusses their potential impact upon companies trading with China.

Export Control Law

China's ECL establishes a unified export control regime applying to "controlled items" ("Controlled Items"). The law defines Controlled Items as "dual-use items³, military products⁴, nuclear materials⁵ and other goods, technologies, services and items that are related to the protection of national security and interests or the fulfillment of non-proliferation or other international obligations."⁶ Notably, Controlled Items include any technical materials or other data related to such items.⁷ In addition to the Controlled Items, the ECL's export control system is manifested by (1) a licensing regime for exporters who wish to export Controlled Items and (2) requirements for end-users and end-use certifications for all Controlled Items.

Controlled Items

The ECL provides that departments under China's State Council and its Central Military Commission that perform expert control functions will act as the ECL's enforcement authorities (the "Enforcement Authorities").⁸ The Enforcement Authorities are charged with developing a list of Controlled Items for which export licenses will be required.⁹ The Enforcement Authorities can designate items that are not on the list of Controlled Items as a "temporarily controlled item" for two years, which can be lifted or extended at the end of the two years.¹⁰  

As noted above, the scope of the Controlled Items includes dual-use items, military products, nuclear materials, and other goods, technologies, or services relating to China's national security or its non-proliferation or other international obligations. While the list of Controlled Items has not yet been published, it is anticipated that it will build upon China's current export control lists. The scope of the Controlled Items list appears to include categories of items controlled under the U.S. Commerce Control List¹¹ and the U.S. Munitions List.¹²

Licensing Regime

The ECL establishes a licensing system for exporters who wish to export Controlled Items.¹³ Licenses are required to export any item on the list of Controlled Items or any temporarily controlled item.¹⁴ Exporters are required to apply for an export license when exporting goods, technologies, or services that fall outside the list of Controlled Items that they know or should know may endanger national security, be used to develop a weapon of mass destruction or delivery vehicle, or be used for terrorist purposes.¹⁵ 

Requirements for End Users and End Uses

The ECL also establishes a risk management system for end-users and end uses of Controlled Items.¹⁶ Exporters are required to submit end-user and end-use certificates to the Enforcement Authorities.¹⁷  The end-user and end-use certificates are to be issued by either the end-user or the government authorities of the country or region where the end-user is located.¹⁸ The end-user of any Controlled Items shall undertake not to change the end-use of the Controlled Item or transfer it to any third party without the Enforcement Authorities' approval.¹⁹ Where exporters or importers find that the end-user or end-use may be changed, they must report the case to the Enforcement Authorities.²⁰

Embargo, Risk Assessment Mechanism, and Blacklist

The ECL contains provisions by which China, to protect its national security or fulfill its international obligations, can prohibit the export of any relevant Controlled Items to any specified country, region, organization, or individuals.²¹ The Enforcement Authorities conduct risk assessments of countries and regions to identify the risk and apply corresponding control measures. These risk assessments may be analogous to the BIS's Country Chart²² specifying reasons for control under the Export Administration Regulations.²³

Finally, the ECL establishes blacklists of importers and users who breach any end-user or end-use requirements, pose a potential endangerment to international security and interest, or use any Controlled Item for any terrorist purposes.²⁴ Exporters cannot trade with importers or end-users on the blacklist, although they can apply to the Enforcement Authorities for an exception.²⁵ Among other measures, importers or end-users that are blacklisted may be prohibited or restricted from trade in the relevant Controlled Items.²⁶  

At present, the ECL's blacklist appears to be independent of the UEL; however, the factors to be considered for an entity to be placed on either list overlap to some extent.  Thus, it may be possible for an entity to be placed on both the ECL's blacklist and the UEL. 

Penalties

Penalties imposed under the ECL can include the following: (i) a warning, (ii) an order to stop the illegal activities, (iii) confiscation of illegal gains, (iv) a monetary fine, (v) suspension of business, (vi) revocation of export business qualification, or (vii) revocation of export license.²⁷ Exporters who export Controlled Items without a license will be investigated for criminal responsibility.²⁸  Exporters who have received any criminal penalty for an export control violation will be prohibited from engaging in export business activities for life.²⁹

Administrative fines under the ECL can be significant and vary depending on the violation. For instance, exporting a Controlled Item without a license can subject an exporter to a fine between five and 10 times the illegal proceeds if the illegal proceeds exceed RMB 500,000, or a fine between RMB 500,000 and RMB 5 million if there are no illegal proceeds or the illegal proceeds are below RMB 500,000.³⁰ In serious cases, the exporter's business can be suspended or its export qualifications revoked.³¹

Extraterritoriality

Finally, the ECL explicitly states that it applies extraterritorially. Organizations or individuals outside the territory of the P.R.C., who violate the ECL and endanger the national security and interests of the P.R.C. or obstruct the fulfillment of its non-proliferation of other international obligations, shall be subject to investigation and legal liability.³² In addition, the ECL applies to the transit, transshipment, through transportation, and the re-export of Controlled Items or their export overseas from any bonded areas, export processing zones, or other special customs supervision zones or export supervised warehouses, bonded logistics centers, or other bonded supervision premises.³³ 

Notably, an earlier draft of the ECL contained a percentage test similar to the de minimis rule under the U.S. Export Administration Regulations ("EAR").  The de minimis rule provides that a foreign-made commodity is subject to the EAR if that foreign-made commodity contains more than a certain percentage (usually 25%) of controlled U.S.-origin content by value.  The de minimis rule has the effect that goods manufactured outside the U.S. that incorporate U.S. parts, components, technology, or software, export of that good might be subject to the EAR.  Under the ECL's percentage test, the transfer of an item from a jurisdiction outside of China to a third country or region would be subject to the ECL if it contained over a certain percentage of Controlled Items.  While the percentage test was removed from the ECL, it may be possible for the test to be revived through administrative regulations.

Unreliable Entities List

The UEL creates a "list-based" sanction regime intended to deter parties from engaging in business or commercial relations with designated foreign entities.  Foreign entities deemed to endanger China's national sovereignty and violate or interrupt regular market transactions with Chinese enterprises, organizations, or individuals, resulting in serious damage to these counterparties, may be placed on the unreliable entities list.  The UEL does not specify whether "foreign entities" include foreign-invested entities in China or Macao, or Hong Kong entities (with or without foreign investment).

The UEL establishes a "working mechanism" composed of relevant departments of the Chinese Communist Party's Central Committee and state organs (the "Working Mechanism"). The Working Mechanism conducts investigations of foreign entities and considers the following factors (the "Factors") when deciding whether to place a foreign entity on the UEL:

• the degree of harm to China's national sovereignty, security, and development interests;
• the degree of damage to the legitimate rights and interests of Chinese enterprises, other organizations, or individuals;
• compliance with international economic and trade rules; and
• other factors.³⁴ 

The Working Mechanism conducts a two-step assessment to determine whether to place a foreign entity on the UEL. First, there is an investigation step whereby the Working Mechanism announces an investigation of the foreign entity. The basis for the investigation can be recommendations from other government departments, third-party complaints, or at the Working Mechanism's initiative. During the investigation, the Working Mechanism can make inquiries of relevant parties, consult or copy relevant documents and materials, and use other necessary methods to investigate the relevant foreign entities' behavior. Foreign entities may make statements and present defenses. Foreign entities may also apply for a suspension designed to protect their legitimate rights and interests.³⁵  

However, if the facts about the behavior of the foreign entity are clear, then the Working Mechanism can fast track the process by skipping the above investigation step described above and assess whether to include the foreign entity on the UEL based on the Factors.³⁶ The Working Mechanism's decision will be announced to the public.  The UEL does not list any defenses to this decision.

Designation on the UEL can subject a foreign entity to numerous restrictions or prohibitions, including the following:

• restricting or banning their import and export activities to and from China;
• restricting or banning their investment in China;
• restricting or banning the entry of their relevant persons and means of transportation in China;
• restricting or canceling the work permit, stay, or residential qualification of their relevant persons in China;
• imposing a fine of a corresponding as appropriate; and/or
• other necessary measures.³⁷ 

Notably, these restrictions or prohibitions are broader than those resulting from a designation on the Entity List, which only subjects entities to additional licensing requirements for any items subject to the U.S.'s Export Administration Regulations.³⁸

A foreign entity can be removed from the UEL if it corrects its behavior and takes measures to eliminate the consequences of its behavior within the time limit specified in the announcement.³⁹ The foreign entity may independently apply for removal from the UEL from which the Working Mechanism will decide based on "actual conditions."⁴⁰ If a foreign entity is removed from the UEL, the Working Mechanism's decision will be made pursuant to an announcement, from which time the restrictions upon the foreign entity shall cease.⁴¹

Key Takeaways

The ECL and the UEL constitute the next evolution of China's trade and sanctions law framework.  Companies that trade, invest, or have supply chains in China should take heed of the increased compliance complexities brought upon by the ECL and the UEL. To attenuate the risks associated with these compliance complexities, companies can take the following steps:

• incorporate the list of Controlled Items, the blacklist of importers and end-users, and the UEL into current procedures governing export control and sanctions;
• develop a system to determine whether an item not otherwise on the list of Controlled Items could still be subject to the ECL based on whether the exporter "knows or should have known" test; 
• establish procedures to apply for licenses to export Controlled Items and mechanisms to ensure that the end-user and end-use requirements are complied with;
• revise their template contracts to include updated language addressing export control compliance provisions including coverage for China; and
• provide training to relevant staff on the intersection of (and potential conflict between) U.S. and China trade regimes.

^{1 Standing Committee of the National People's Congress, Export Control Law of the People's Republic of China (中华人民共和国出口管制法), promulgated on October 17, 2020 (eff. December 1, 2020).
2 P.R.C. Ministry of Commerce, Provisions on the List of Unreliable Entities (不可靠实体清单规定), promulgated and effective on September 19, 2020.
3 "Dual-use items" refer to items that can be used for civil purposes, as well as for military purposes or for helping improve military potentials, especially those goods, technologies, and services that can be used for the design, development, production, or use of weapons of mass destruction.  ECL, Art. 2(4).
4 "Military products" refer to equipment, special production facilities, and other related goods, technologies, and services that are used for military purposes.  ECL Art. 2(5).
5 "Nuclear" refers to nuclear materials, nuclear equipment, non-nuclear materials used for nuclear reactors and the related technologies and services.  ECL Art. 2(6).
6 ECL, Art. 2(1).
7 ECL, Art. 2(2).
8 ECL, Art. 5(1).
9 ECL, Art. 9(1).
10 ECL, Art. 9(2).
11 The CCL has 10 categories of controlled items: nuclear materials, facilities, and equipment; materials, organisms, microorganisms, and toxins; materials processing; electronics; computers; telecommunications and information security; lasers and sensors; navigation and avionics; marine; and propulsion systems, space vehicles, and related equipment.  See BIS, Commerce Control List, 15 C.F.R. Part 774 Supplement No. 1
12  The U.S. Munitions List is a list of articles, services, and related technology designated as defense and space-related by the United States federal government. 22 C.F.R. § 121.1
13 ECL, Art. 12(1).
14 ECL, Art. 12(2).
15 ECL, Art. 12(3).
16 ECL, Art. 17.
17 ECL, Art. 15.
18 ECL, Art 15.
19 ECL, Art. 16(1).
20 ECL, Art. 16(2).
21 ECL, Art. 10.
22 See BIS, Commerce Control List Overview and the Country Chart, Supplement No. 1 to Part 738
23 ECL, Art. 8(2).
24 ECL, Art. 18(1).
25 ECL, Art. 18(3). 
26 ECL, Art. 18(2).
27 ECL, Arts. 33-44.
28 ECL, Art. 43.
29 ECL, Art. 39(1).
30 ECL, Arts. 34.
31 ECL, Arts. 34.
32 ECL, Art. 44.
33 ECL, Art. 45.
34 Provisions, Art. 7.
35 P.R.C. Ministry of Commerce, Reporters' Q&A on the Unreliable Entities List on October 12, 2020
36 Provisions, Art. 8.
37 Provisions, Art. 10.
38 15 C.F.R. Section 744.11(a).
39 Provisions, Art. 13(1).
40 Provisions, Art. 13(2).
41Provisions, Art. 13(3).}

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