[Text Box:] [Text Box: China's New Law on Foreign NGOs: Does it apply to you, and if so, what do you need to know?] [Text Box: May 2016] [Text Box: Hogan Lovells]
China's New Law on Foreign NGOs: Does it apply to you, and if so, what do you need to know? May 2016
China's New Law on Foreign NGOs: Does it apply to you, and
if so, what do you need to know?
Do you work for a non-profit or non-governmental organization that was formed outside of China, but is considering activities or plans related to China? If so, you will want to consider the implications of China's new Foreign NGO Law. Read on to see how it impacts you.
The PRC National People's Congress ("NPC") passed the final Law of PRC on Management over Foreign NGOs' Activities in China (the "Foreign NGO Law") on April 28, 2016, which will become effective from January 1, 2017. The Foreign NGO Law is the third of a series of laws that were proposed last year to address the growing concerns by China's leadership about national security and foreign interference with China's domestic affairs.' The second draft of the Law (the "Second Draft") had been released about one year ago and received extensive comment and criticism both from domestic and foreign parties concerned about its potential adverse impact. While the Foreign NGO Law as adopted reflects some improvements from the previous drafts and appears to relax certain previously proposed restrictions and burdens on Foreign NGOs' activities in China, many issues and questions are still not clarified or addressed. Whether or not the drafters intended to place a significant damper on the activities of Foreign NGOs in China will need to be further evaluated based on the implementing rules and guidance and the actual experience with the registration process.
The Foreign NGO Law includes a rather vague definition of a Foreign NGO (the "Foreign NGO") as follows: "non-profit, non-government social organizations that have been legally established outside China, such as foundations, social organizations, and think tanks, etc."2 Particularly unhelpful is the inclusion of "etc." as part of the definition. This Alert discusses the key implications of the Foreign NGO Law and outlines some of the areas that will hopefully be addressed in the implementing guidance. (We have prepared a separate Alert that addresses the particular issues related to schools, hospitals, research institutions and academic organizations under the law, which can be accessed here.
T TWO PATHS TO CONDUCT ACTIVITIES IN CHINA
Once the Law becomes effective, Foreign NGOs will only be able to conduct activities through one of two paths:
through a Foreign NGOs' representative offices ("RO"s) in China, which is the only type of legal form that Foreign NGOs are allowed to established in China under the Foreign NGO Law. It is also specifically provided that a Foreign NGO shall not establish branch offices within China, unless otherwise provided for by the State Council; or
as a "temporary activity" approved by and filed with the relevant authorities (such record-filing is valid for up to one year unless a new record filing is done with the Registration and Administration Authority).
II. ADMINISTRATION AND OVERSITE AUTHORITIES
1. Dual-layer approval and registration mechanism
The Foreign NGO Law sets out a "dual layer" of supervision over Foreign NGOs' activities in China. As to the first layer, (1) for establishing a RO, the Foreign NGO shall secure the approval from the Supervisory Authority; or (2) for carrying out temporary activities, a Foreign NGO is required to be
The series of laws adopted or proposed last year to address the growing concerns by China's leadership about national security and foreign interference with China's domestic affairs include four legislations. The other three legislations are: (i) the National Security Law of the People's Republic of China, which became effective from July 1, 2015; (ii) the Anti-terrorism Law of the People's Republic of China, effective from January 1, 2016; and (iii) the PRC Cyber Security Law, the draft of which was released for public comments on July 6, 2015.
2 See Article 2 of the Foreign NGO Law.
[Text Box: 2 Hogan Lovells] sponsored by a Chinese unit (which can be government agencies, people's organizations, public institutions or social organizations, the "Chinese Cooperative Body"), who must then obtain relevant authorities' approval for such temporary activities of the Foreign NGO. The second layer would fall under the authority of the Ministry of Public Security and its branches at provincial level ("MPS"), being either its approval on registration application for a RO establishment or the record filing with MPS (although the application obligation is also placed on the Chinese Cooperative Body) for the temporary activities.
In addition to the above "dual layer" administration and supervision mechanism, the government authorities that are authorized to exert their powers to regulate Foreign NGOs' activities in China broadly include the authorities for national security, foreign affairs, fiscal affairs, financial supervision and management, customs, tax and foreign experts, etc., according to their respective powers and responsibilities.
MPS as the primary oversight authority
A substantial change to the existing regulatory regime on the activities of (foreign and domestic)
NGOs in China is that MPS will be the primary authority over a Foreign NGO, acting as the Registration and Administration Authority, as opposed to the current supervision and registration mechanism whereby the Ministry of Civil Affairs and its local branches ("MOCA") is the primary agency for activities of all NGOs in China. During the comment period, this shift raised
considerable concerns from Foreign NGOs and other commentators, but given the national security impetus driving the adoption of this Law, this approach was retained by the drafters.
Strengthened MPS's Powers
In addition to the registration or filing authority of MPS over Foreign NGOs' activities, MPS has
also been granted comprehensive supervisory and regulatory powers including (i) to conduct annual inspections of Foreign NGOs' ROs, (ii) to take various measures in case of discovery of acts violating the Foreign NGO Law, such as entering into and inspecting premises and activity venues of a Foreign NGO in China and checking, duplicating and sealing up relevant documents under its discretion, and (iii) to check the bank accounts of units or individuals related to an incident under investigation and to grant approval to freeze funds in the related bank accounts. The Foreign NGO Law has even further strengthened such enforcement powers by adding the below powers for MPS:
to meet and discuss with the chief representative and other persons in charge of the RO(s) of Foreign NGOs;
to order cessation of the temporary activities through the Chinese Cooperative Body (if MPS deems that the filed temporary activities may jeopardize the national security); or
to blacklist a Foreign NGO and prohibit it from establishing RO(s) or carrying out temporary activities in China if such Foreign NGO commits certain severe crimes.
III. FUNDING LIMITATIONS IMPOSED ON FOREIGN NGOS' ACTIVITIES IN CHINA
The Foreign NGO Law includes various provisions restricting funding resources and use of funds by Foreign NGOs for their activities in China. In addition, Foreign NGOs and their ROs are specifically prohibited from fundraising within China. The permissible funding resources for the Foreign NGOs for
China's New Law on Foreign NGOs: Does it apply to you, and if so, what do you need to know? May 2016
their activities in China are limited to: (1) funds from lawful sources outside of China; (2) interest on bank deposits accrued in China; and (3) other funds legally acquired within China.
In addition, the Foreign NGO Law requires that:
for a Foreign NGO with registered RO, it shall only use the RO's bank account filed with the MPS to manage the funds used in China;
for the Foreign NGOs carrying out temporary activities, it shall use its Chinese Cooperative Body's bank account to manage the funds used in China, with the funds subject to separate bookkeeping and being earmarked for dedicated purposes; and
other than the above two circumstances, a Foreign NGO, as well as it Chinese Cooperative Bodies and other individuals, are not allowed to use alternative methods to pay or receive funds relating to Foreign NGOs' activities in China.
REPORTING AND PUBLICATION REQUIREMENTS
As required under the Foreign NGO Law, the RO of a Foreign NGO shall submit its activity plan for the next year to its Supervisory Authority for approval and then to the MPS for record filing. Its annual report shall also be filed with its Supervisory Authority for comments and then with the MPS for annual inspection. Such annual report shall be also disclosed online to the public. In case of temporary activities, a Foreign NGO and its Chinese Cooperative Body are obligated to submit a written report on such activities and fund use to MPS within 3o days following conclusion of the temporary activities.
UNCLEAR ISSUES SUBJECT TO FURTHER IMPLEMENTING RULES AND INTERPRETATIONS
Given the structure of the Foreign NGO Law, the implementing regulations will be critical to the actual ability of Foreign NGOs to comply with the Foreign NGO Law. Until the implementing regulations are adopted, there is no means for registration of a Foreign NGO's RO or for approval of temporary activities. Critical issues such as identifying the entities eligible to serve as a Chinese Cooperative Body and those government authorities that will serve as the Supervisory Authorities for the respective fields of activity will need to be accomplished sufficiently in advance of the effectiveness of the Foreign NGO Law to enable Foreign NGOs to arrange relationships with Chinese Cooperative Bodies and apply for approvals. Given that it will be quite complex and time-consuming to prepare the filing and obtain approval for a Foreign NGO's RO, the time is already tight in order to meet compliance by January 1, 2017.
1. Will Forei n NGOs' activities be limited to en a in in a s s ecified catalo e of activities?
The Foreign NGO Law provides that MPS will, in conjunction with the relevant authorities, formulate the catalogue of areas and projects for Foreign NGOs' activities and publicize the Supervisory Authority directory in order to provide guidance to the Foreign NGOs in carrying out their activities in China. However, as to the concern on whether Foreign NGOs will be only allowed to carry out activities in China only within those areas listed under this catalogue, the NPC Standing Committee indicated that such catalogue is not likely to be conclusive by the inclusion of "etc." However, this approach is likely to leave considerable uncertainties on the permitted scope of Foreign NGOs' activities in China, while at the same time, leaving discretionary authority to the relevant agencies to limit the scope of activities.
What is the intent of the prohibition on for-profit activities?
The Foreign NGO Law specifically prohibits the Foreign NGOs from engaging in or providing financial support to for-profit activities, political activities and, illegally, with respect to religious activities.3 While the restrictions on political and religious activities have long been in effect, no guidance has been provided in the Foreign NGO Law on what types of activities will be deemed as either carrying out or sponsoring for-profit activities in China. For example, given the general inability to register a non-profit subsidiary in China in the past but the desire to be able to hire employees, rent space and conduct activities in China, many Foreign NGOs have set up subsidiaries in China as for-profit legal entities (usually in the form of a wholly foreign-owned
entity, "WFOE"), either as a direct subsidiary, or perhaps within a holding company for its overseas operations. Given the prohibition on for-profit activities and the language of Article 94 that applies restrictions on direct or indirect activity, it is not clear whether these existing WFOEs will be permitted to continue their operations in China under grandfather approval rules, and
whether the WFOE is still an available option for a Foreign NGO to enter into China with its overseas for-profit holding company.
Will there be a grandfather rule for Foreign NGOs' representative offices that have already established?
Under the final Foreign NGO Law, there is no clear provision addressing the treatment of those representative offices already established by Foreign NGOs and registered with the MOCA. Based
on informal guidance from the NPC Standing Committee, it appears likely that these already established representative offices will be acknowledged as legally existing under PRC Law and permitted to continue their operation under a grandfather or transition rule. It also appears likely that a further mechanism will needs to be formulated to address the transition of the registration and administration authority over them from MOCA to MPS.
Will Foreign NGOs be allowed to establish a foundation or a private social organization in China?
It remains to be seen whether the elimination of the requirements and restrictions on establishment of a foundation or private social organization in China that were included in the Second Draft when the final Foreign NGO Law was adopted indicates that it is still be possible for Foreign NGOs to establish or co-establish foundations or private social organizations in China. The fact that the recently adopted PRC Charity Law (effective from September 1, 2016) does not include an explicit prohibition on a Foreign NGO itself or jointly establishing a charity organization (which includes, foundations, social groups, or social service institutions and similar organizations) in
China does present some comfort. However, given the restrictions on fund-raising by Foreign NGOs, this is likely to be an area of continued uncertainty.
VI. LIABILITIES AND PENALTIES
3 Article 5 of the Foreign NGO Law provides: "Foreign NGOs that conduct activities within China shall comply with the law of China; shall not threaten China's national unity and safety and the unity of all ethnic groups of China; shall not jeopardize China's national interests, societal public interests or the legitimate rights and interests of the citizens, legal persons and other organizations. Foreign NGOs shall not engage in or provide financial support to for-profit activities or political activities within China. They are also forbidden to illegally conduct or sponsor religious activities."
4 Second paragraph of Article 9 of the Foreign NGO Law provides: "A Foreign NGO that has not established and registered a representative office or has not completed the record-filing for conducting temporary activities is not permitted to directly or indirectly conduct activities within China, and shall not directly or indirectly entrust and sponsor any unit or individual within China to conduct activities within China."