On July 28, 2008, the State Administration of Foreign Exchange (SAFE) issued a circular to address problems during the online verification of foreign exchange collections and the settlement of proceeds from exported goods. During the online verification process, sometimes banks are unable to match the exporter entities with their corresponding foreign exchange collection entities because of legitimate exclusive distribution arrangements or parent-subsidiary relationships. The circular provides a grace period until December 31, 2008 for exporters to correct the discrepancies.
On July 14, 2008, SAFE enacted the Measures for the Online Verification of Foreign Exchange Collection and Settlement of Export Proceeds, Circular 29). An accompanying circular, Circular 31, sets forth some implementation rules of Circular 29. Under Circulars 29 and 31, an enterprise must collect foreign currency proceeds from exported goods through an account that is opened at a qualified bank and is registered under the enterprise’s name. The account is to be exclusively used for the collection of these proceeds. The bank must run a search in an online database set up by customs to verify the legitimacy of the proceeds before allowing any withdrawal from the account. The online database generates an enterprise’s amounts receivables based on relevant data declared in customs forms and provided by SAFE.
In practice, however, when exporters and collectors of proceeds differ because of authorized exclusive distributorships or parent-subsidiary (branch) relationships, banks are unable to run online verifications. In response, the General Department of the SAFE issued the Circular on Relevant Issues Concerning the Implementation of Online Verification where there are Inconsistencies Between the Export Entity and the Foreign Exchange Collection Entity, Circular 122) on July 28, 2008.
Circular 122 provides for a grace period during which a foreign exchange collector, subject to the SAFE’s approval, may collect, settle and transfer foreign currencies at the bank, even if the collector’s name does not match the exporter’s name. If inconsistencies arise from legitimate exclusive distributorships or parent-subsidiary (branch) relationships before December 31, 2008, the collector may apply to the local SAFE branch for the settlement or withdrawal of funds from the exclusive accounts by presenting relevant export contracts and other supplementary materials. Upon the local SAFE’s approval, the collector may ask the bank to settle the amounts or allow withdrawal from its exclusive account.
After the grace period, there will be no exceptions to Circulars 29 and 31. In other words, after January 1, 2009, the collector of the proceeds, the exporter, and the entity listed in the online database to be verified must be identical. The grace period will extend beyond January 1, 2009 for parties to export contracts signed on or before the issuance date of Circular 122 that provide for the collections of foreign currencies after January 1, 2009, as well as for collectors who go through mergers or spin-offs that result in names discrepancies. All parties to export contracts signed after the issuance date of Circular must strictly comply with Circulars 29 and 31.