On October 17, 2020, the Standing Committee of the National People's Congress (“NPC”) passed the widely concerned Export Control Law of the People's Republic of China (“Export Control Law” or “Law”), which will take into effect as of December 1, 2020. The Export Control Law will formalize the legal framework of China's rapidly developing export control regime, which is in nowadays built on the multiple scattered administrative regulations, ministry rules and enforcement measures.

This Note will briefly introduce the legal framework and basic rules of export control regime formalized by the Law and, from the perspective of practice, introduce its implication on business activities of foreign and domestic relevant enterprises.

I. Scope of Regulated Persons/Items/Activities of the Export Control Law

1. Regulated Persons

The following persons (including individuals, companies and other organizations, etc.) engaging in import and export related activities are subject to the regulation of the Export Control Law (“Regulated Persons”):

  1. Exporters;
  2. Third-party service providers for import and export activities (such as providers of agency, freight, delivery, customs declaration, third-party e-commerce transaction platform services and financial services); and
  3. Foreign importers and end-users.

Extraterritorial Jurisdiction

The Law to some extent, has extraterritoriality in its jurisdiction. According to Article 44 of the Law, the organizations and individuals outside of China who, in violation of the export control regulations, obstruct the fulfilment of international obligations such as non-proliferation and damage China’s national security and interests, shall be held legally accountable.

The Controlled Person List (See Section II.2) also embodies such extraterritorial effect of the export control measures under the Law. A foreign person, for its violation of the relevant obligations under the Law (e.g., violation of the requirements on end-user and end-use management), may be included in the Controlled Person List, which may significantly affect its business operation.

2. Controlled Items

The Controlled Item is the nexus where the competent authorities establish the jurisdiction against a regulated person, i.e., the control measure adopted by the competent authorities will, in principle, only apply to and affect activities involving controlled items[1].

The Controlled Items prescribed under the Law, in their nature, can be divided into the following three categories:

  1. Dual-use items, military items and nuclear;
  2. Other goods, technologies, services and other items that are related to safeguarding China’s national security and interests and fulfilling international obligations such as non-proliferation; and
  3. Technical materials and other data related to the Controlled Item.

It is noteworthy that, compared to its second draft, the Law newly includes “technical materials and other data related to the Controlled Item” in the Controlled Items. Also, as reported, during the deliberation of the final draft of the Law, some members of the Standing Committee suggested specifying “technical materials and other data” into “source codes, algorithms, technical materials and other data” to “enhance the protection of the legitimate rights and interests overseas of Chinese technology companies”[2]. Although the stipulated version of the Law does not adopt such suggestion, the competent authorities may adopt such interpretation and include the source codes, algorithms, etc. related to the Controlled Item into the scope of “technical materials” in their enforcement practice.

Pursuant to the Law, the competent authorities will establish and release the export control list, directory or catalogue (collectively, “Controlled Item List”) to determine the specific scope of Controlled Items. In addition, for a particular product, technology or service that is not on the Controlled Item List, the Law authorizes the competent authorities to designate it as a “Temporarily Controlled Item” for up to two years following certain pre-approval procedures. Temporarily Controlled Items will be subject to the same control measures with items on the Controlled Item List.

3. Covered Activities

The Law covers the following activities relating to Controlled Items:

  1. Transfer of the Controlled Item from the territory of China to overseas;
  2. Chinese person’s provision of the Controlled Item to foreign person(s);
  3. Transit, transshipment, through transport, and re-export of the Controlled Item; and
  4. Exporting the Controlled Item to overseas from special customs supervision areas such as bonded zones and export processing zones, and bonded supervision areas such as export supervision warehouses and bonded logistics centers.

The Law only sets out principle provisions on the activities such as “re-export” and “deemed export”, which have attracted wide attention during the solicitation of public opinions. The detailed rules and standards on the identification of covered activities are pending further interpretation of implementation regulation of the Law (if any) and the enforcement practices of PRC competent authorities.

II. Export Control Measures

1. Export License System

The export of any Controlled Item shall be subject to upfront license. An exporter shall make the application for and obtain the export license regarding the Controlled Item to the competent authorities prior to the shipment. In determining whether to grant an export license, the competent authorities shall take all following factors into consideration:

5) National security and interests, international obligations and commitments;

6) Types of export, sensitivity of the Controlled Item, countries or regions of destinations for export (“Destination”), end-users and end-uses;

7) Relevant credit records of the exporter; and

8) Other factors prescribed by laws and administrative regulations.

With regard to the end user and/or end-use of the Controlled Items, the exporter is obliged to provide certification documents issued by the end user or governmental organs of the country/region where the end user is located. The end   user is also obliged to undertake not to divert the end use of the Controlled Item concerned or transfer such Controlled Item to any third party without permission; and if the aforesaid situation takes place, the exporter and importer of the Controlled Item are obliged to report it to PRC competent authorities immediately upon discovering any such diversion and transfer.

2. Controlled Person List (Blacklist)

Pursuant to the Law, PRC competent authorities will establish an Controlled Person List against certain foreign importers or end users which violates requirement of the Law. The Controlled Person List is similar to the “Entity List” in US export administration regime. Under the Export Control Law, once the foreign importer or end user is included in the Controlled Person List (“Controlled Person"), the competent authorities may impose restrictive measures as deemed necessary by the authorities, such as prohibiting or restricting PRC entities’ transactions with such Controlled Person involving Controlled Items, ceasing the ongoing export of Controlled Items to such Controlled Person, etc. Accordingly, any PRC exporter shall not engage in transaction with such Controlled Persons in violation of relevant measures as determined by the authorities.

Specifically, any of the following circumstances might cause the inclusion of a foreign importer or end user in the Controlled Person List:

  1. Violating the requirements on management of end user or end use of the concerned Controlled Item;
  2. Possibly endangering national security and interests;
  3. Using Controlled Items for any terrorism purposes.

Importers and end users on the Controlled Person List may apply to be removed from the Controlled Person List if they have adopted measures to cease the above circumstance(s) concerned.

Relationship between the Controlled Person List and the Unreliable Entity Lists (“UEL”)

On September 19, 2020, the Ministry of Commerce People’s Republic of China (“MOFCOM”) unveiled the Provisions on the Unreliable Entity Lists (“UEL Provision”), pursuant to which, multiple regulatory agencies of China are authorised to imposed restrictive measures over the trade, investment, travel and other activities of foreign persons listed on the UEL as published by MOFCOM[3]. MOFCOM has not yet released the first batch of unreliable entities.

The Controlled Person List has certain similarities with UEL. For example, they both target at entities that endanger “national security and interests”, and the restrictive measures applicable to both lists include the restrictions or prohibitions on certain import and export activities of the listed entities.

However, the Controlled Person List and the UEL function in different dimensions as two parallel systems. The restrictive measures under the Controlled Person List are limited to the Controlled Items and cover only trade related activities, while the restrictive measures under UEL may cover all items (including the civil items) and cover not only trade activities but also other aspects such as restrictions on domestic investment, entry of related persons and fines, etc. To some extent, the restrictive measures under the UEL are more of the nature of “sanction” measures. If compared with relevant US regimes, the UEL is more akin to the Specially Designated Nationals List (SDN List) under the US economic sanction regime and the Controlled Person List is more akin to the “Entity List” under the US export administration regime.

3. Embargo

The Law also provides the embargo regime to formalize the current multiple embargo measures based on the scattered laws, administrative regulations, and rules and measures issued by various departments. With the approval of the State Council or of the State Council and the Central Military Commission, the competent authorities, together with other departments concerned, may implement the following embargo measures:

  • Prohibiting the export of related Controlled Item;
  • Prohibiting the export of related Controlled Items to certain Destination;
  • Prohibiting the export of related Controlled Item to certain Person.

III. Significance of Internal Export Control Compliance

To enterprises, the Law sheds light on the significance of establishing and improving the internal export control compliance.

The Law allows PRC competent authorities to give the exporters which have established a “well-functioning” internal export control compliance system more favorable treatment regarding the export of the Controlled Item(s), e.g. a general license. The general license or other facilitation measures (not specified yet) that might be granted to enterprises which have established a “well-functioning” internal export control compliance system can greatly reduce the administrative approval costs in the process of goods export for export enterprises. This regime will provide significant incentives for enterprises to establish and strengthen their internal export control compliance system.

IV. Legal Liability

Pursuant to the Law, the violation of export control may trigger administrative liability and criminal liability in the meantime.

The administrative liability against the violations under the Law is of more deterrence. The maximum amount of an administrative fine against a single violation is twenty (20) times of the illegal gains. In addition, the competent authorities may, as the case may be, impose other administrative penalties such as confiscation of illegal gains, cancellation of business qualification for the export of certain Controlled Item(s), and refusal of export license application within a certain period.  For violation by a company or an organization, the personnel directly in charge and other directly responsible personnel of the concerned activities may also be held individually accountable by certain restrictive measures, e.g., prohibition from engaging in certain trade activities within a certain period or permanently.

The Law also points out that, the conduct of “exporting any Controlled Item that is prohibited from being exported” and “exporting any Controlled Item without the required upfront license” may lead to the criminal prosecution and conviction under the crime of smuggling or illegal operation. The personnel directly in charge and other directly responsible personnel of the concerned activities in the company or organization may also be charged for criminal liabilities (such as fines and imprisonment).

V. How to Deal with the Impact of the Coming Export Control Law?

The implementation of the Law will have a significant and direct impact on the trade related business of both onshore and offshore enterprises, and bring challenge to their internal export control compliance. The stakeholders may put more attention and start improving its internal export control compliance from the following aspects:

  • Conduct internal self-examination, sort out product lines and supply and sales chains, so as to ensure an accurate classification of products concerned and a full understanding of trading counterparts in upstream and downstream.
  • Take preventive actions, adjust the existing business processes with high risk, and add standard compliance clauses (such as commitments of importers and end users) in business documents.
  • Establish a sound internal compliance system, strengthen compliance training and improve internal alertness system.