By Ren Qing, Pan Jingyi [1]
When ZTE was penalized in a big amount of fine by the U.S. government, there were comments saying that the export control in China was without “teeth”. If these comments to some degree reveal the truth, the situation will soon change. Lately, the Ministry of Commerce (MOFCOM) has published the Export Control Law of PRC (Draft for Comments) (hereinafter referred to as the “Draft”) for soliciting public comments. [2] The Draft explicitly includes “deemed export” and reexport in its application scope, perfects provisions on embargo as an additional control measure, reinforces administration on end-users and end-use, expands investigatory powers of export control authorities and aggravates punishments against illegal acts. The enactment of this new law may have significant implications on business operations of both domestic and foreign enterprises, and thus is worth relevant enterprises’ close attention.
I. Necessity of Legislation
Why does China has the motive to enact the Export Control Law considering the dozens of existing administrative regulations and rules in this area? MOFCOM has put forth three rationales as to the necessity of legislation in its Introduction to the Draft, of which the second rationale is that “China’s current export control rules and regulations are promulgated at an early stage with low hierarchy in the law system, and problems relating to insufficient enforcement authority and impossibilities of investigating and closing certain cases in practice have derogated the authority of export control work”. [3] We understand that this rationale is the most realistic rationale that calls for legislation reform, and also the one that needs enterprises’ greatest attention. As detailed in the following paragraphs, the Draft indeed renders solutions to these problems.
II. Application Scope
Articles 2, 3 as well as Articles 64 through 69 in the Draft provide application scope of the Export Control Law. By including deemed export and reexport into its application scope, the Draft has enlarged (or has further clarified) the scope of export control in China.
According to the Draft, items under control are classified into four categories, namely (1) dual-use items (items for both civil and military use), (2) military items, (3) nuclear items, and (4) other items related to national security. Each category covers relevant goods, technologies and services. The scope of items under control is thus expanded compared to that in the past.
Behaviors under control are classified into two categories, namely (1) transferring across the border the controlled items from the territory of China, and (2) providing controlled items to foreign nationals, legal persons or other organizations by China’s nationals, legal persons or other organizations. The first classification emphasizes the notion of “across the border”, thereby including either exports of the nature of trade or other forms of 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; unless otherwise specified, controlled items transferred to the above area or regions shall also be subject to export control.
The second category mainly refers to “deemed exports”, namely providing controlled goods or technologies in the territory of China to foreign persons, or residents in Taiwan area, Hong Kong and Macao Special Administrative Regions. This may include, allowing foreign persons who work, study or visit temporarily in China to access to relevant equipment or technical materials, or communicating orally with foreign persons, etc. While “deemed export” has been the focal point of export control law enforcement in the U.S., China has not maintain specific provisions over this issue until the Draft finally brings it into its application scope.
Additionally, the Draft includes reexport in its application scope. The following two circumstances are deemed as reexport: (1) controlled items that have been exported outside the territory of China are further exported to a third country or region; (2) controlled items that have been exported outside the territory of China are used for manufacturing of new products and such new products are further exported to a third country or region. In the second scenario, China’s export control law only applies if value of the controlled items has reached certain proportion in the total value of the reexported products.
III. Competent Authorities
Currently, the export control of China involves various government departments, where division of responsibilities and cooperation both exist. The export of nuclear, missile, biological and chemical dual-use items are under the administration of MOFCOM jointly with other departments like State Administration of Science, Technology and Industry for National Defense (SASTIND, also named as “China Atomic Energy Authority”) and Ministry of Industry and Information Technology (MIIT). The export of nuclear items is administered by SASTIND together with MOFCOM. The export of military items is administered by SASTIND in association with the Equipment Development Department of the Central Military Commission.
In light of Articles 5 and 6 of the Draft, the current framework of administration over export control would remain basically unchanged, although slight changes might occur.
IV. Control Lists
For the convenience of law enforcement as well as compliance, major countries and regions maintain control lists for export control. According to Articles 13 to 15 of the Draft, an export control system consisted of “two lists and two additional measures” would be established in China.
“Two lists” refer to dual-use items export control list and military items export control list. Without doubt the latter corresponds to the Administrative Catalogue of Export of Military Products that is now in place. However, ambiguity exists as to whether the former list will be established in the form of an unified list or, following current practice, in the form of separate lists for “controlled chemical products”, “relevant chemical products”, biological dual-use items, missile dual-use items, nuclear dual-use items, etc. (These lists are included in the Catalogue of Dual-Use Items and Technologies Subject to Administration of Export License [4]). Moreover, as mentioned in above, controlled items are classified into four categories in the Draft; apart from dual-use items and military items, the Draft does not touch upon whether to establish lists for the other two categories of controlled items. As for nuclear items, it might be a result of negligence given the existence of the current Nuclear Export Control List. As for other items related to national security, a list is not expected to be made for the very miscellaneous nature of this category.
Two additional measures are (1) provisional control measures, i.e. imposing control over items outside the control lists in the form of provisional notices, when it is impossible to adjust the control lists in time for sake of effectiveness of export control work; (2) embargo, mainly referring to prohibiting exports of relevant controlled items or exports destined to specified destinations, natural persons, legal persons or other organizations, for purpose of implementing international obligations such as the resolution of the UN Security Council. Current regulations have set forth provisions on provisional control measures, and embargos that prohibit exports of specified items to specified countries have already been in place. Nevertheless, current laws or regulations and practices cannot provide explicit provisions or guidelines over embargos that target at specified individuals or entities. The Draft has filled this gap by drawing experiences from the U.S. as well as other countries and regions.
V. License Administration
There are two aspects contemplated by the export license regime for the controlled items: one is the administration of qualification for export operators, and the other is the administration of licenses for export transactions.
Article 20 of the Draft provides that export operators for controlled items are subject to monopoly, record-filing or other administrative measures. Currently, controlled chemicals and military items are subject to monopoly of trade, while for exporting other dual-use items, export operators are required to be registered with MOFCOM. It remains to be seen whether the use of the term “record-filing”, instead of “registration”, implies a further deregulation of qualification for exporting dual-use items.
Articles 20 to 31 of the Draft are general provisions about license administration for export transactions. Similar to the current practice, licenses are categorized into two types, individual licenses and general licenses. The competent authority will consider national security, international obligation and other factors when determining whether to grant a license. It is especially noteworthy that the Draft contains at least 5 articles concerning administration of end users and end use, including that the importer or the government of the importing country is required to issue a certificate of end user and end use; that the importer commits not to change the end use and the end user; that the export operator is required to review the end user and the end use; that the competent authority can send personnel to conduct on-site verification regarding the end user and the end use; that a blacklist of foreign importers and end users will be established. Sections II and III of Chapter III of the Draft set forth detailed provisions for export license administration for dual-use items and military items, respectively.
VI. Investigatory Powers
Chapter IV of the Draft sets forth provisions on daily supervision and enforcement investigations, the most distinguishing feature of which is that the competent authority of export control has been bestowed with full power of investigation and enforcement. The competent authority is authorized to take the following measures: (1) entering into and examine the business places or other relevant places of the investigated operators; (2) inquiring the investigated operators, interested parties or other relevant entities or individuals, and asking them to explain the situation; (3) looking up and copying relevant documents, agreements, accounting books, business correspondence, electronic data, etc.; (4) examining the conveyance used for export, stopping the loading of suspicious export items, and requiring the return of illegally exported items; (5) closing down and seizing items concerned; and (6) checking and freezing bank accounts of the investigated operators.
VII. Legal Liabilities
The Draft provides liabilities for seven categories of illegal acts, which include exportation without license, provision of untruthful information when applying for licenses, defraud/sale of export licenses, abet, conspiracy or provision of convenience or similar illegal acts, circumvention behaviors, violation of blacklist control, and obstruction of investigations. Most illegal acts other than exportation without license and defraud/sale of export licenses are not explicitly specified in current regulations.
The Draft provides multiple legal liabilities over illegal acts such as exportation without license, including (1) confiscation of illegal gains; (2) imposition of fines on export operators; (3) imposition of fines on directly responsible person-in-charge and other directly liable persons; (4) entering credit information including but not limited to administrative penalties imposed on export operators and their major responsible person into the National Credit Information Sharing Platform; (5) dismissal of export license application made within three years by any unlawful export operators; (6) temporal seizure or withdrawal of qualification of the export operator; and (7) criminal liabilities under the Criminal Law if the violation concerned constitutes a crime. Compared to current laws and regulations, the major changes are to increase the upper limit of amount of fines for export operators from five times to ten times of revenue of illegal business, and to introduce 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 in reexport of controlled items.
VIII. Compliance Guidance
Several measures are introduced in the Draft to guide and encourage enterprises to comply with export control laws: (1) license convenience regime, i.e. the authorities will provide license conveniences such as issuance of general licenses to enterprises that maintain an internal export control compliance system; (2) consultation regime, i.e. export operators may apply to consult with the authorities on whether the goods to be exported fall within the scope of controlled items; (3) administrative guidance regime, i.e. the authority will publish from time to time export control guidelines and best practices; (4) risk warnings regime, i.e. the authority will notify export operators any violation risks by issuing warning letters or calling in for talks.
This brief introduction is not intended to cover every aspect of the Draft. The author welcomes any comments or questions on the content of the Draft or its implication for enterprise operation, or on the current export control regime in China.
[1] Ren Qing is a partner of Global Law Office, Beijing, and Pan Jingyi is an associate of the same firm. Email: renqing@glo.com.cn.
[2] See MOFCOM website: http://tfs.mofcom.gov.cn/article/as/201706/20170602594467.shtml.
[3] MOFCOM’s Introduction to the Draft is avaibale at: http://tfs.mofcom.gov.cn/article/as/201706/20170602594467.shtml.
[4] The latest version of this Catalogue is available at: http://aqygzj.mofcom.gov.cn/article/zcgz/201612/20161202447592.shtml.
