Export control appears to be an overlooked area in China for years. Up until now in China, more focus was placed on the import side of international trade, which provides around one-third of the total revenue for the Chinese government. Although China is not yet a member state to the Wassenaar Arrangement, China has enacted a number of separate administrative regulations and lists on each specific category of controlled items, such as biological, nuclear and chemical dual-use items and military items, by referring to the Wassenaar Arrangement. China, however, has lacked a comprehensive export control law and, as a result, very few enforcement actions apparently occurred over the past years.

The current export control regime is going to change following the issuance of the draft Export Control Law of the People's Republic of China (the "ECL") by the Ministry of Commerce ("MOFCOM") for public comments on June 16, 2017.

The draft ECL is not just a simple combination or repetition of the existing separate PRC export control regulations and rules. Instead, it introduces a comprehensive series of new legal concepts such as "re-export", "deemed export" and "embargo," and raises the maximum penalties from the current five (5) times the "illegal gains" to ten (10) times the "illegal turnover." Once enacted, the law will substantially broaden the outreach of the PRC export control regime and pose significant compliance challenges for multinationals dealing with the PRC controlled items.

1. Who Will Be Impacted?

Under the draft ECL, the PRC export control regime can essentially impact anyone dealing with the items subject to control. Jurisdiction is extended not only to individuals or entities of the PRC nationality, but also to non-PRC individuals and entities.

Notably, in addition to exporters, foreign importers and end users, the draft ECL also explicitly lists agents, freight forwarders, customs brokers, e-commerce platforms and financial service providers as the parties subject to the PRC export control.

2. What Items Will Be Controlled?

Generally, the following four (4) categories of items will be subject to control under the draft ECL: (1) dual-use items; (2) military items; (3) nuclear items; and (4) other items that may affect the national security of China.

The control will apply not only to the transfer of "tangible" items, but also to “intangible” items like technologies and services. Unlike in many other jurisdictions, software now is not listed as a category of controlled items in the current version of the draft ECL.

Most of the items subject to control will be listed in the Dual-Use Items Control List and Munitions Control List (collectively, the "Lists") to be formulated and periodically adjusted by the PRC regulatory authorities. However, as further discussed below, items not on the Lists may be subject to control in certain situations. Currently, China is maintaining several separate lists under the existing export control regulations. It is still unclear whether these existing lists will continue to be used or new lists will be formulated.

The draft ECL applies to a wide array of activities relevant to controlled items, including:

Export - “Export” is broadly defined as the “transfer of controlled items from the PRC to a foreign country or region,” including HK, Macao and Taiwan. No further definition is provided for the term "transfer." Based on existing PRC export control laws and regulations, "transfer" may be broadly construed to include both export sales and non-sale cross-border movements, such as shipments to trade shows and returns for repairs.

Re-Export - The newly-introduced re-export rule expands the extraterritorial application of PRC export control laws by covering not only exports directly from the PRC, but also subsequent exports of PRC-origin items or foreign-manufactured products that contain more than de minimis PRC controlled content (the specific de minimis percentage is not specified in the draft ECL) from a foreign country to a third country.

Deemed Export - The provision of controlled items by a PRC person or entity to a non-PRC person or entity will be deemed as an export to the home country of such foreign person or entity, and is thus subject to the licensing requirement. This rule applies regardless of whether the provision takes place within or outside the PRC.

Transit, Transshipment and Export via Special Customs Supervision Areas - The transit and transshipment of controlled items and export of controlled items via a special customs supervision area of the PRC, such as a FTZ, bonded logistic park and bonded zone, will also be subject to the PRC export control.

4. How to Control?

The draft ECL provides the following measures to restrict the export of controlled items:

Export Qualification Requirement - The draft ECL appears to change the current registration system for export operators of dual-use items and nuclear items to a simplified record-filing requirement, while continuing to restrict the export privilege of military items to the entities designated only by the PRC authorities.

Licensing Requirement - Generally, a license must be obtained for the export, re-export, deemed export, transit and transshipment of controlled items, unless a license exception applies. The following factors are required to be considered in determining whether to grant or deny a license application: (1) international obligations or commitments; (2) the sensitivity of the items; (3) the supply and demand in the market; (4) the end use and end user; and (5) the export control compliance mechanisms of the export operator.

Comprehensive Control Requirement - The export of items not listed on the ECL may be subject to the above licensing requirement, provided the exporter knows or has reason to know that the export may affect the national security of the PRC, have diversion risks or be used to support terrorist activities.

Temporary Export Control - The draft ECL also authorizes the PRC regulatory authorities to implement temporary controls on items not listed on the ECL where necessary.

Embargo - For the first time, the draft ECL introduces the concept of "embargo" which allows the PRC regulatory authorities to impose a complete ban on the exports of certain controlled items, or prohibit the exports of certain controlled items to specified destinations, individuals or entities.

Blacklist - The PRC authorities may place the foreign importers and end users violating PRC export control laws on a blacklist, and prohibit the export of controlled items to such foreign importers and end users. They also may revoke the export licenses related to the transactions with such foreign importers and end users.

Retaliatory Measures - The draft ECL authorizes the PRC authorities to take corresponding retaliatory measures against the countries or regions that implement discriminatory control measures on the PRC.

5. What Will Be the Consequences for Violations of PRC Export Control Laws?

Violation of the PRC export control laws may result in severe administrative or even criminal penalties on the companies and individuals involved.

Administrative Penalties - Depending on the specific situations and severity of the violations, the export operators may be subject to, among others, a fine up to ten (10) times the "illegal turnover," confiscation of illegal gains (if any) and suspension or revocation of the export license or qualification.

The employees, if deemed as the "persons-in-charge" or "other direct responsible persons" (not defined in the draft ECL), may be subject to a fine up to RMB 300,000 (around USD 43,000) as well.

Criminal Penalties - Criminal prosecution will be pursued if the violations constitute a crime. Under the current PRC criminal laws, the following crimes, among others, may be implicated for violations of PRC export control laws: (1) the crime of smuggling weapons, nuclear materials or prohibited items; (2) the crime of illegal operation; and (3) the crime of stealing, spying, acquiring or illegally providing state secrets or intelligence to foreign entities or individuals. The penalties for these violations could include both a monetary fine and imprisonment (up to life imprisonment in some cases, for instance, the smuggling of military products and similar items)