China Revises Guidance on Export Control Compliance Programs under the New Export Control Law

On April 28, 2021, China's Ministry of Commerce ("MOFCOM") issued Notice No. 10/2021: Guiding Opinions on Establishing Internal Compliance Programs for Export Control by Exporters of Dual use Items (the "Guiding Opinions").¹ This reference document is the first implementing rule of the Export Control Law ("ECL")2 enacted on December 1, 2020. It provides guidance to establishing an internal Export control Compliance Program ("ECP") under the new legal framework. 

The Guiding Opinions replace the previous 2007 guidance,² summarize the basic principles and fundamental elements of an effective ECP as specified in the Guidance for Internal Export control Compliance Programs related to Dual use Items (the "ECP Guidance"),³ and recommend actions that MOFCOM as the competent government authority can take to encourage companies to adopt an effective ECP in practice. The newly enacted ECL and forthcoming implementing rules will serve as the new legal framework of the ECP. 

Basic Principles

The Guiding Opinions underscore the importance of three basic principles – legality, independence and effectiveness – for an ECP in China and reiterate the importance of ECP independence by suggesting that an ECP may⁴ "veto" any activity that violates China's export control laws and regulations.

Under the previous ECP regime, the concept of "comprehensive control" was identified as a key principle; however, the formal adoption of this concept in Article 12⁵ of the ECL signifies its importance as a legal rule and obviates the need for it in the Guiding Opinions. Instead, the new principle of "effectiveness" is introduced to shift the focus on the application cycle, review, assessment and improvement of the ECP, so it can actually work in practice.

Fundamental Elements

The 2007 Opinions provided six general elements necessary for an effective ECP, and while there was an intention to develop an official ECP framework, MOFCOM was unable to achieve this objective. The Guiding Opinions further develop the six elements and introduce three additional ones with reference to similar programs adopted by the United States ("US ECP") and the European Union ("EU ICP").⁶ The ECP Guidance specifies the main content and steps to take with regard to each of the nine elements.

1. Statement of policy: Every ECP must contain a statement of policy (equivalent to the "Management Commitment" under an US ECP or the "Top Level Management Commitment to Compliance" under an EU ICP) made by the entity's top executives or principals, who assume primary responsibility over the ECP and publicly endorse compliance policies both internally and externally. The ECP Guidance provides a template for the "ECP Statement of Policy" and "Employee Acknowledgment" letter, the text of which highly resembles the US ECP language.
2. Organization structure and responsibilities: Similar to the EU ICP, MOFCOM separately recognizes an independent ECP body within the entity's organizational structure as one of the fundamental elements of an effective ECP. An ideal ECP structure, if allowed,⁷ comprises three levels: (i) an "Export Control Compliance Committee" or "Chief Compliance Officer (CCO)" to lead the work; (ii) a separate department or position (independent to business departments) for coordination, support and supervision; and (iii) regular business departments and units for implementation. The ECP Guidance provides a more detailed description of the responsibilities for each level.
3. Comprehensive risk assessment (newly added): MOFCOM introduces this new element in the ECP, requesting a full risk assessment of items to be exported, research and development ("R&D"), internal operations and practice, circumstances of customers, destination and third parties involved in export processes, and their risk solutions. The ECP encourages exporters to consult with MOFCOM (and its agencies) or external advisors to address questions during the risk assessment process. Notably, the corresponding chapter in the ECP Guidance elucidates key concepts under the ECL. For example, the ECP Guidance provides an official interpretation of "deemed export," which was not clearly defined under the ECL. Similar key concepts are likely to be addressed in forthcoming ECL related implementing rules. 
4. Screening procedure: Consistent with the 2007 Opinions, MOFCOM emphasizes that a systematic control procedure is necessary to exercise export controls under an ECP. The ECP Guidance provides a detailed description of each screening step with "red flag" indicators⁸ covering: (i) pre contract screening of items, end uses and end users, and transfer/transit activities; (ii) the licensing application process; and (iii) implementation of contract and post licensing controls. The ECP Guidance further suggests that entities may specify in their internal screening procedures the criteria to "approve," "cancel" and "suspend" a transaction, as well as specify the conditions required to "proceed" a suspended transaction amidst an on going investigation. Although the SCP Guidance also recommends incorporation of a tailored compliance contract provision for the purpose of mitigating or eliminating export control risk, it does not provide any sample text for reference.
5. Emergency measures (newly added): The ECP Guidance recommends establishing whistleblowing and escalation procedures as well as corresponding investigation procedures to ensure potential violations are promptly flagged. Once identified, the entity must take "remedial measures, including but not limited to, suspending contract performance, freezing shipments, retrieving shipments in transit, and improving the ECP."
6. Training: MOFCOM encourages entities to conduct comprehensive export control training programs for the entire staff, including those in the export business, R&D, procurement, accounting and finance departments, to promote awareness and proficiency. 
7. Compliance audits (newly added): Inspired by similar elements in the US ECP and EU ICP, the Guiding Opinions introduce standard audit procedures to strengthen the effectiveness of the ECP. The compliance audit can be comprehensive, covering the entire business operation, or specialized to tailor to particular units or export activities. Annex 2 of the ECP Guidance provides a sample checklist that covers all of the nine ECP elements in a compliance audit process, the format of which resembles the checklists in the US ECP. Compliance audits can be conducted internally by designated staff, or externally by a specialized third party.
8. Recordkeeping and documentation: The Guiding Opinions and the ECP Guidance improve this element by providing details on records that must be kept and documented under the ECP, including among others:
    

   (a)    Export documents: such as technical documents of items, commercial documents (e.g., inquiry, quotations, purchase orders, contracts, commercial invoices, packing lists, bills of lading, payment records);

   (b)    Correspondence: such as emails, telephone/fax logs and other communication records with customers, relevant third parties and relevant government agencies;

   (c)    Licensing documents: such as license applications and approvals and post licensing reports; and

   (d)    Internal records: such as internal screenings, ECP related rules, meeting minutes and resolutions, violation reports and action records, ECP training materials and records, and ECP audit reports.

   The ECP Guidance proposes that documents and records are retained for a minimum of five years. 

9. Compliance manual: The Guiding Opinions reiterate the importance of maintaining an up to date compliance manual to provide quick and easy reference for staff and stakeholders. 

Outlook

Although not mandatory,⁹ establishing an ECP is highly instructive and practical, particularly for China's state owned enterprises ("SOEs") seeking to incorporate compliance programs and mechanisms into their business operations.¹⁰ The ECP not only covers exporters of dual use items, but also importers and exporters of commercial cryptography and precursor chemicals, intermediate service providers engaged in the export of dual use items (such as logistic brokers, customs agents, freight forwarders, e commerce platforms and financial institutions), and enterprises and research institutions involved in R&D and the production of dual use items.¹¹

Chinese entitles that establish an effective ECP by following the recommendations in the Guiding Opinions and the ECP Guidance are eligible for certain unspecified licensing facilitations as stipulated in Article 14 of the ECL. The Guiding Opinions also recognize that the adoption and implementation of an ECP is a proactive measure to mitigate or even eliminate potential damages from an export control violation, possibly leading to lower penalties. 

According to the Guiding Opinions, MOFCOM plans to take other actions to encourage Chinese entities to establish ECPs, such as organizing or promoting ECP training, providing specific ECP guidance to exporters, and organizing and administering ECP assessments. Entities with global operations that involve business with China may also find that certain elements of the ECP can be easily integrated into their current US ECP or EU ICP compatible programs.

_{1 MOFCOM Notice No. 10/2021 dated April 28, 2021 (in Chinese).
2 MOFCOM Notice No. 69/2007 dated August 29, 2007 (the "2007 Opinions") (in Chinese).
3 Attachment to MOFCOM Notice No. 10/2021(in Chinese).
4 The ECP is not binding or mandatory, but rather encouraged.
5 The ECL has adopted the concept of comprehensive control (often referred to as "catch all control"), which extends export control authority to items that are (i) not listed as controlled items, or (ii) only subject to temporary control. Article 12 provides that a license is required for the export of uncontrolled items if the exporter "knows or should have known, or is notified by the competent export control administrative authorities" that such items may bear risks of national security or national interests, among others.
6 See US Department of Commerce Bureau of Industry and Security ("BIS"), Export Compliance Program – The Elements of an Effective Export Compliance Program; and the European Commission Recommendation 2019/1318 on Internal Compliance Programmes for Dual use Trade Controls under Council Regulation (EC) No. 428/2009.
7 This is premised on the entity which introduces or establishes the ECP having sufficient resources to set up a sophisticated ECP framework.
8 The ECP Guidance also provides in Annex 1 a "Red Flags Checklist" that resembles the US ECP checklist, illustrating certain red flags that an entity may identify when screening its customer, its product or the delivery process.
9 The first draft of the ECL in late 2019 once required that "exporters must establish internal export control compliance and review mechanisms" {emphasis added}, while the second ECL draft in mid 2020 removed this obligation for exporters.
10 China's SOEs are actively establishing various compliance programs, including ECPs, to adapt to rapidly changing international environments. According to a news press from China's central government (available here, in Chinese), as of May 2021, all of China's SOEs at the central level had established their respective internal compliance committees.
11 The Guiding Opinions, Art. 5.}

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