Jan Holthuis
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As part of the trade war between China and the US, the US has already used its strict export control regime to restrict some of China’s corporate giants such as HUAWEI and ZTE. In response, the State Council of the PRC issued the Official legislative work plan for 2019, which lists the Draft PRC Export Control Law (“Draft ECL”). Although a first version of the Draft ECL was already publicized in 2017, the Draft ECL is now highly possible to come into force by the end of 2019.
1. Background
In general, the Draft ECL regulates the export of sensitive items (including goods, technologies and services) that are relevant to China’s national security. Once enacted, the law will substantially unify and strengthen the export control regime in China and broaden the scope of items under export control. At the same time, it will pose significant compliance challenges to Chinese exporters and overseas companies dealing with the PRC controlled items.
In this article, the most important changes for foreign invested companies will be discussed and some recommendations will be given in order to be compliant under the new law.
2. Important changes
China’s current export control regime was built on dozens of existing administrative regulations in this area. By comparing the more comprehensive Draft ECL to the current regulations, we have summarized some of the most significant changes below.
A. Controlled Items
The Draft ECL redesigns the list of controlled items.
According to the Draft ECL, items under the export control are classified into four categories, including:
The export 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 is not listed as a category of controlled items in the current version of the draft ECL.
The first two categories (a and b) will be further specified in a Dual-Use Items Control List and Munitions Control List (collectively the “Lists”), which is to be formulated and periodically adjusted by the PRC regulatory authorities. The Draft ECL does, however, not mention whether new lists will be created for the other two categories of controlled items (c and d). Considering the existence of the current Nuclear Export Control List; the current list may still be effective under the Draft ECL. As for the other items related to national security, no list is expected to be created given the extensive nature of this category.
The Draft ECL also provides provisional control measures, such as imposing control over items outside the List, when this would be necessary for the sake of effectiveness of export control work. The provisional control period will not exceed two years.
B. Behaviors under export control
Behaviors under the export control are classified into two categories, including:
The category a) includes not only export trades, but also transfers arising out of outbound investment, overseas exhibitions, foreign aids, foreign donations, etc. Moreover, the notion “the territory of China” does not include Taiwan area, Hong Kong and Macao Special Administrative Regions, which means unless otherwise specified, controlled items transferred to the above areas or regions shall also be subject to the ECL.
The category b) mainly refers to “deemed exports”. For example, allowing foreign persons who temporarily work, study or visit (in) China to access to the abovementioned controlled items will be considered as the category b) behaviors. Please note that this is the first time China brings the specific provisions regarding deemed export into its export control regime.
C. Extraterritorial effect
Furthermore, re-exports of controlled items will also be restricted by the Draft ECL. Under the Draft ECL, the following two circumstances are deemed as re-export:
This rule provides an extraterritorial effect to the Draft ECL. It means that, 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 with PRC nationality, but also to non-PRC individuals and entities. An overseas holding company with a WFOE in China therefore should be extremely careful when conducting such controlled re-export activities. As its WFOE in China may directly suffer investigations and punishments once its holding company was found acting not compliant with the Draft ECL outside of China’s territory.
D. Parties subject to the Draft ECL
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 regime.
Furthermore, the Draft ECL regulates the embargo, mainly referring to prohibiting exports of relevant controlled items or exports destined to specified destinations, natural persons, legal persons or other organizations. The purpose here is to implement international obligations, such as the resolution of the UN Security Council.
E.Strengthening enforcement powers
To strengthen the enforcement powers, the Draft ECL grants full power of investigation and enforcement to the competent authorities. The competent authorities are authorized to take measures such as:
F. Illegal acts and liabilities
Under such strict supervisions, companies should ensure not to conduct any illegal acts in their daily operations. The Draft ECL stipulates seven categories of illegal acts, including:
Most of these illegal acts, other than exportation without license and defraud/sale of export licenses, are not explicitly specified in current regulations.
For abovementioned illegal acts, companies involved and their responsible persons will bear multiple legal liabilities including:
Compared to current laws and regulations, the major changes are (1) the increase of the upper limit of fines for export operators from five times the illegal gains to ten times the illegal turnovers, and (2) the introduction of fines for individuals (with an upper limit of 300,000 Yuan).
It remains to be seen whether and in what way the aforementioned punishments will be applied to foreign individuals or entities that are engaged re-exporting controlled items.
G. Compliance guidance
In addition to the strict supervision and severe penalties, several measures are introduced in the Draft ECL to guide and encourage enterprises to comply with the ECL, including:
3.Recommendations for foreign invested companies
The ECL is still in its draft ECL form and it remains to be seen how the legislative provisions will be enforced, whether any exemptions will be introduced, and if there will be any meaningful updates. Given its potential impact, foreign invested companies that may be affected are well advised to start early to understand the implications of the new law on their compliance obligations, supply chains, and business operations. In order to prepare well and be in compliance with the ECL, foreign invested companies are recommended to follow up on the points below:
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