China issues comprehensive Export Control Compliance Guidance for Dual-Use Items

The issuance of the Guidance Document is considered a follow-up to the requirements under Article 5 of China’s Export Control Law, which requires the export control administrative authority to issue guidance of export control for relevant industrial sectors aiming to guide export operators to establish and improve their internal compliance program for export control alongside the business.

In the press conference of MOFCOM on 29 April 2021, the official mentioned that the Guidance Document was prepared based on an in-depth study conducted by MOFCOM, solicited extensive industrial comments, and references international practices. Although it is not mandatory for export operators to implement an export control compliance program, the authority encourages relevant stakeholders to do so, using the Guidelines. This Guidance Document is an update to the Guidance on the Establishment of Internal Export Control Mechanisms by Export Operators of Dual-Use Items and Technologies published in 2007 (2007 Guidance) and supersedes the previous 2007 Guidance.

Key takeaways of the Guidance Document and the Internal Compliance Guidelines

Nine key Elements

The Guidance Document contains nine key elements:

• Formulation and issuance of policy statement.
• Establishment of an organizational structure.
• Conducting a comprehensive risk assessment.
• Establishment of review procedures.
• Development of contingency measures/emergency response measures.
• Providing compliance training.
• Improving compliance audits.
• Recordkeeping.
• Management manual.

Compared with the 2007 Guidance, the latest Guidance Document contains more specific and detailed suggestions and has added three new elements (comprehensive risk assessment, contingency measures, and compliance audits).  The Internal Compliance Guidelines are also structured to have provided "implementation points" and "examples," in addition to the main contents, which greatly improves its operability and practicability for companies who engage in export activities to build up an effective compliance program.

Scope of application of the Guidance Document

This Guidance Document in general applies to all kinds of export operators (including universities, research institutes and other relevant entities) engaging in export activities of dual-use items¹ as specified in the Export control Law (Export Operators).  Export Operators may refer to the Guidance Document and the Internal Compliance Guidelines to develop their internal compliance program for export control based on their own business characteristics and risk assessment.

In addition, the Guidance Document also explicitly encourages the following types of entities to establish and improve their internal compliance program by taking the relevant principles and elements into account:

• Exporters applying for End-User and End-Use Certificate at the MOFCOM.
• Exporters and importers of commercial encryption products and precursor chemicals.
• Operators providing agency, freight, delivery, customs clearance, third-party e-commerce trading platforms and financial services for export of dual-use items.
• Enterprises and research institutes engaged in R&D, production and other operations of dual-use items.

Benefits and incentives of implementing an Export Control Compliance Program

The Export Control Law does not impose a mandatory requirement for export operators to implement an internal export control compliance program. The preface of the Internal Compliance Guidelines echoes this position and states that it is designed to serve as reference purpose with specific guidelines. Therefore, it is generally interpreted that implementing an internal trade compliance program based on the Guidance Document and Internal Compliance Guidelines cannot exempt an export operator from potential liabilities in case of any violation. However, export operators may benefit from its internal compliance program if implemented in the following aspects:

• Export licenses: the authority will take an effective trade compliance program into consideration when deciding whether to grant facilitation measures such as general export licenses to certain export operators (Article 14 of the Export Control Law).
• Reduced penalties: where an exporter implements an effective internal compliance program works but commits an export violation of dual-use items, the authority could render a lighter penalty if such exporter has taken the initiative to eliminate or mitigate the consequences (Article 4 of the Guidance Document).
• Credit record: although this is not directly linked, exporters who commits export control violations could see their credit record reduced in the official enterprise system, bringing a negative impact on such exporters when applying for an export license (Articles 13 and 39 of the Export Control Law).

Comparison to the Export Compliance Guidelines of BIS

Many enterprises with overseas operations or export activities based in China may already have established internal compliance programs based on the compliance requirements of other jurisdictions such as the United States (U.S.) and the European Union. According to MOFCOM, those enterprises can consider imbedding additional requirements of the Guidance Document and the Internal Compliance Guidelines into their existing compliance programs. Those who have not established an internal compliance program are recommended to develop one by taking reference to the Guidelines.

In order for companies to better understand the similarities and the distinctions between China’s export compliance guidance and those prevailing ones in the international practice, we set out a comparison chart for the eight elements of Export Compliance Program (ECP) proposed by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce and the nine elements of the Guidance Document here.

Authored by Roy Zou, Stephanie Sun, Min Chen, and Flora Feng.