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On 17 October 2020, China passed its Export Control Law (the "Law") after a third review by the Standing Committee of China's National People's Congress. The Law provides the Chinese government with the framework to ban exports of strategic materials and advanced technology to specific foreign companies designated on its "Control List" (defined below), which is China’s equivalent of the U.S. Department of Commerce's Entity List. Under the Law, China may take reciprocal countermeasures against any country or region that abuses export-control measures and poses a threat to China's national security and interests. It marks another step in the tit-for-tat escalation between China and the U.S. This alert summarized the key changes in the final version of the Law compared to previous drafts.
On 17 October 2020, China passed its Export Control Law (the "Law") after a third review by the Standing Committee of China's National People's Congress ("NPC"). Only ten months have passed since the Law was reviewed for the first time in December 2019 and now the Law will enter into force on December 1, 2020.
The Law provides the Chinese government with the framework to ban exports of strategic materials and advanced technology to specific foreign companies designated on its "Control List" (defined below), which is China’s equivalent of the U.S. Department of Commerce's Entity List. Under the Law, China may take reciprocal countermeasures against any country or region that abuses export-control measures and poses a threat to China's national security and interests. It marks another step in the tit-for-tat escalation between China and the U.S.
The final version of the Law is largely similar to the previous version reviewed by the NPC at the end of June but there are some key changes, which are summarized as below. Please see our previous alert for a more general overview of the Law.
"Controlled Items" is defined as dual-use items (civil use and military use), military items, nuclear items and other goods, technologies, and services pertaining to defending national security and interest and fulfilling international obligations. The Law now adds a separate provision to include data (technical information and other data) related to the Controlled Items in this definition.
Although "technical information" is not defined under the Law, based on a new report published on NPC's website, during the review session of the Law some committee members suggested including source code and algorithms are included. The committee members were referring to 5G technologies, quantum communication and related technologies when considering expanding the definition of Controlled Items to protect the interests of Chinese entities in their overseas business.
Under Article 18 of the Law, importers and end users could be added to the Control List for the following reasons: (a) violation of end use and end user commitments; (b) endangering national security interests (which are newly added in the Law compared to previous drafts); or (c) use of Controlled Items in terrorism activities. Being blacklisted has consequences including prohibition or restriction of transactions related to Controlled Items and suspension of export privileges for Controlled Items.
The Law now makes it possible to transact with listed entities under special circumstances and based on approval from the competent authority. That said, the Law does not explain the criteria for granting such exemption nor the application process.
The Law also added a clause which allows an entity to be removed from the Control List if the above mentioned reasons no longer exist. Such removal could be based on the entity's application or at the authority's own initiatives. The Law, however, does not specify the procedure for such application.
Such revisions echo the recently promulgated Regulation on Unreliable Entity List (see our previous alert). The Unreliable Entity List ("UEL"), which has not been published, is to designate foreign entities that have put China's national sovereignty, security, and development interests in danger by suspending transactions with Chinese entities or by applying discriminatory treatment against Chinese entities. Entities on the UEL also may be subject to penalties. Article 12 and Article 13 of the Regulation similarly allow exemptions for transaction with entities on the UEL based on application made by Chinese companies, organization or individuals, or based on the authority's decision. What is different is that Article 14 of the Regulation seems to indicate that as long as the entities on the UEL rectify its actions within the grace period and adopts measures to eliminate the consequences of its actions, it should be removed from the UEL. Under the Law, it is however the authority’s sole discretion on whether to remove one entity from the Control List.
Previous drafts of the Law provided that any violation of the Law that constitutes a crime is subject to criminal charges. Article 43 of the Law now provides that exporting Controlled Items, which are prohibited from export or without a license in violation of the Law, will face criminal charges.
It appears that the Law is signaling that such violations may now be subject to criminal liabilities regardless of whether such violation constitutes a crime under the Criminal Law. The current Criminal Law does not contain specific provisions on such offenses but typically punishes such violation as smuggling or illegal business operation. It remains to be seen whether amendments will be made to the Criminal Law in accordance with the Law.
The first draft of the Law, published in 2017, allows the Chinese government to retaliate where a foreign government takes "discriminatory" export control measures against China. This provision was deleted from the draft in 2019 when the Law was reviewed for the first time, but now appears again in this final version. The language under the Law now reads "where any country or region which abused export control measures that jeopardize the national security and interests of China, China may, depend on the circumstances, take reciprocal measures", which appears to be broader than "discriminatory" measures.
Article 5 of the Law requires the authority to publish sector specific export control guidelines to "guide the exporters to establish a comprehensive export control internal compliance program". Considering that Article 14 already includes provisions on establishing an effective compliance program with facilitation measures, adding this new clause reflects the great emphasis the Law puts on it.
Relatedly, previous drafts of the Law provided that, as long as the companies have an effective compliance program, the authority will take such factors into consideration when deciding whether to grant facilitation measures related to licenses such as general export licenses. Article 14 of the Law now expands the scope pf facilitation measures to all kinds of measures instead of just ones related to licenses. This indicates that the Law has increased the reward for companies that implement comprehensive compliance programs.
Previous drafts of the Law have identified safeguarding "national security" as one of its measures, such as temporary control (Article 9) and the extraterritorial reach of the Law (Article 44), as well as one of the primary factors to consider when deciding whether to grant an export license (Article 13). The final version of the Law, however, expands the purpose to "national security and interest". It also elevates this purpose to the top prioritized reason or factor, with international obligations following second. Article 43 also adds a new provision which specifies that any violation under the Law which endangers national security and interest is to be punished under other applicable laws and regulations in parallel.
Article 44 explicitly provides that organizations and individuals outside China will be held liable if they violate export control rules, impede China's fulfilment of its international obligations, or otherwise endanger China's national security.
Under Article 2 of the Law, exports are defined to include (i) a transfer of controlled items from the territory of the People's Republic of China to overseas, and (ii) Chinese citizens, legal persons, and organizations providing controlled items to foreign citizens, legal persons, and other organizations. The second prong of the definition indicates that the transfer of controlled technology to a foreign person in China is also regulated, which would appear to be similar to the "deemed export" or “deemed reexport” concepts under the U.S. Department of Commerce's Export Administration Regulations (EAR) which restricts the "release" of "technology" or source code to foreign persons in the U.S or outside the U.S..
Similarly, this provision appears to have board application, including not only multinational companies with a presence in China, but also non-Chinese companies that merely have access to Chinese items and technology, including technical data under control outside China.
Under Article 15, exporters are required to submit a certification of end user and end use when submitting a license application. Such a certificate shall be issued by the end user or the government agencies where the end users are located. There is still no standard form of the end use certification attached to the Law. After the issuance of an approved export license, exporters are obligated to report any change of end user and end use, upon discovery of such change. End users, on the other hand, must commit not to change the end use or transfer the items to third parties. The authority may "inspect" end-users and end-uses, without specifying whether it will be onsite or remote.
Reportedly, China is also drafting the implementation rules of the Law and relevant lists/catalogues. It remains to be seen whether there will be consolidated new regulations and lists (such as consolidating the existing dual-use items and technology catalogue, nuclear item catalogue and military item catalogue all into one), or only amendments to existing rules and lists. It is advisable to monitor such legislation developments and consider providing comments when the consultation drafts are made public.
The Law will enter into effect in less than two months, regardless of whether more detailed implementation rules and lists/catalogues are published beforehand. This could lead to uncertainties in enforcement due to the absence of detailed guidance on practice. Companies therefore should conduct an export control risk assessment to identify any Controlled Items made or shipped by the Company, as well as any other export compliance risks associated with its business. It is also critical to keep records of such risk assessment and related internal procedures.
The importance of having a comprehensive export control compliance program cannot be overstated. There are various steps and measures that need to be implemented in this regard. As the Law has not provided detailed guidance in this regard, the companies may refer to the elements of an effective export compliance program suggested by U.S. Department of Commerce, including management commitment, risk assessment, export authorization, recordkeeping, training, audits and etc. That said, it is also equally crucial to update existing compliance program based on the Law and its upcoming implementation rules.
Authored by Rachel Xu, Kelly Ann Shaw, Ajay Kuntamukkala, Ben Kostrzewa, and Roy Zou