Place: Insights / Perspectives / Detail
The Provisions on Unreliable Entity List: China's First Sanctions Regulations (I)
2020-09-19Qing Ren | Zheng Xu | Ningxin Huo | Shuang Cheng

In late May 2019, the Ministry of Commerce of China (MOFCOM) announced that China would establish an Unreliable Entity List (“UEL”) system. One year and four months later, MOFCOM, upon approval from the State Council of China, formally promulgated the Provisions on Unreliable Entity List (“Provisions”) on September 19, 2020.[2] Under the Provisions, China may list a foreign entity into the UEL and take certain restrictive measures of the sanctions nature. The Provisions have taken effect since September 19, 2020.

 

1. Purpose and Targeted Foreign Entities

 

China establishes the UEL System with the aim to its safeguard national sovereignty, security, and development interests, to maintain fair and free international economic and trade order, and to protect the legitimate rights and interests of enterprises, other organizations, and individuals of China (“Chinese Person”).[3]

 

Specifically, under the UEL System, China will adopt measures in response to the following actions taken by a foreign entity, i.e. an enterprise, other organization, or individual of a foreign country, “in international economic, trade and other relevant activities”, which:

 

  • endanger national sovereignty, security or development interests of China;

  • suspend/discontinue normal transactions with a Chinese Person, or apply discriminatory measures against Chinese Person, in violation of normal market transaction principles and seriously damaging legitimate rights and interests of the Chinese Person.[4]

 

It seems that the Provisions will have extraterritorial effect, as the actions taken by a foreign entity “in international economic, trade and other relevant activities” can be broadly interpreted to cover actions taken outside China.

 

2. Authorities to Administer the UEL

 

To implement the UEL System, China will establish a Working Mechanism composed of relevant central departments (in Chinese “Zhongyang Guojia Jiguan”). The Office of the Working Mechanism (“Office”) is located at MOFCOM.[5]

 

It is expected that the above-mentioned “central departments” may include, in addition to MOFCOM, the Ministry of Foreign Affairs, the Ministry of Defense, the Ministry of National Security, the Ministry of Public Security, and some other departments under the State Council or under the Central Committee of the Communist Party of China.

 

Within MOFCOM, the Bureau of Industry, Security, Import and Export Control (“BISIEC”) will likely be designated as the department responsible for the daily work of the Office. BISIEC is also in charge of export control of dual-use goods and technologies in China.

 

3. Factors to be Considered for Listing

 

When making a decision on whether to include a foreign entity into the UEL, the Working Mechanism will take into overall consideration the following factors (“Listing Factors”):

  • to what degree the national sovereignty, security or development interests of China are endangered;

  • to what degree the legitimate rights and interests of a Chinese Person are damaged;

  • whether the actions of the foreign entity are in compliance with internationally accepted economic and trade rules; and

  • other factors that shall be considered.[6]

4. Listing Procedures

 

A foreign entity can be included on the UEL (“Listing”) with or without investigations.

 

An investigation may be initiated by the Working Mechanism based on suggestions and reports from the relevant parties, which may include the Chinese Person whose interests have been damaged by the actions of a foreign party, industry associations, and government agencies. An investigation may also be initiated ex officio by the Working Mechanism. In either case, the initiation of an investigation will be publicly announced (“Announcement of Investigation”).[7]

 

During the investigation, the Working Mechanism may inquire the foreign entity concerned and other relevant parties, search or copy relevant documents and materials, or investigate by other necessary means. The foreign entity concerned will have opportunities to defend its case.[8]

 

The Working Mechanism may, based on actual circumstances, decide to suspend or terminate the investigation. A suspended investigation could be resumed should the facts underlying the suspension decision have substantially changed.[9]

 

According to the results of the investigation and by taking into consideration the Listing Factors, the Working Mechanism shall make a decision on whether to include the foreign entity on the UEL, which shall be publicly announced.[10]

 

Under the circumstance that facts about the actions taken by a foreign entity concerned are unambiguous, the Working Mechanism may, by taking into overall consideration the Listing Factors, directly make its decision without investigations. In such a case, any affirmative decision to include the foreign entity concerned on the UEL, shall be publicly announced.[11]

 

5. Consequences of Being Listed

 

The Working Mechanism has discretion on whether to take restrictive measures against a listed foreign entity. In other words, restrictive measures do not necessarily follow the Listing.

 

In the announcement by which a foreign entity is listed on the UEL (“Announcement of Listing”), an alert about the risks of conducting transactions with the listed foreign entity may be made.[12] As a result, business partners of the listed foreign entity within or outside of China will have to consider whether to continue existing transactions, or entering into new transactions, with the listed foreign entity, even though they are not expressly prohibited from continuing (or entering into) such transactions. In addition, the Announcement of Listing may also specify a time limit (“Grace Period”) for the listed foreign entity to rectify its actions.[13]

 

Based on actual circumstances, the Working Mechanism may decide to take one or several of the following measures (“Measures”) with respect to the listed foreign entity and make an announcement of the decision (“Announcement of Measures”):

  • restricting or prohibiting the foreign entity from engaging in China-related import or export activities;

  • restricting or prohibiting the foreign entity from investing in China;

  • restricting or prohibiting the foreign entity’s relevant personnel or means of transportation from entering into China;

  • restricting or revoking the relevant personnel’s work permit, status of stay or residence in China;

  • imposing a fine of the corresponding amount according to the severity of the circumstances; and

  • other necessary measures.[14]

Blocking or freezing measures are not expressly provided for in the Provisions, but could be covered by the term “other necessary measures”.

 

It should be noted that the Working Mechanism is authorized (but not obligated) to take the above Measures. It is also clarified that the above Measures shall be implemented “in accordance with law” by the “relevant departments” in light of their respective duties and functions.[15] The “law” herein may include, among others, the Foreign Trade Law, the National Security Law, the forthcoming Export Control Law, the Administrative Penalty Law, and their implementing regulations and rules. The “relevant departments” may include, among others, MOFCOM, the Ministry of Foreign Affairs, the Ministry of Public Security, the General Administration of Customs, and their local counterparts.

 

It is further provided that the above Measures shall not be implemented within the Grace Period.[16] Where the listed foreign entity fails to make rectifications within the Grace Period, the Working Mechanism may take one or several of the Measures.

 

As to the Measure (1) (i.e. import or export restriction or prohibition), the Provisions establish a licensing procedure. Where, under special circumstances, it is necessary indeed for a Chinese Person to conduct transactions with the foreign entity concerned, the Chinese Person may submit an application to the Office, and conduct transactions upon approval.[17] No similar procedure is available for other Measures.

 

6. How to Be Delisted

 

A listed foreign entity may be removed from the UEL (“Delisting”).

 

A Delisting decision may be made by the Working Mechanism ex officio. First, the working mechanism may, based on actual circumstances, decide to remove the foreign entity from the UEL. This may be the case if, for example, the underlying facts leading to the Listing have substantially changed. Second, where a listed foreign entity rectifies its actions within the time limit specified in the Announcement of Listing and takes measures to eliminate the consequences of its actions, the Working Mechanism shall remove the foreign entity from the UEL.[18]

 

A foreign entity may also apply for its removal from the UEL. In such a case, the Working mechanism will decide whether to delist it based on “actual circumstances.”[19] To obtain a Delisting decision, the foreign entity may have to demonstrate that it has rectified its actions and takes measures to eliminate (or at least mitigate) the consequences of its actions.

 

In either case, the Delisting decision will be announced (“Announcement of Delisting”). Once the foreign entity is delisted, any Measures that have been taken shall be ceased as of the date of the Announcement of Delisting.[20]

 

To Sum up, there will normally be four steps from the initiation of investigation to the removal from the UEL, as illustrated below:

 

 

7. Timetable for the First Tranche of UEL

 

According to MOFCOM, no timetable has been preset as for issuing the first tranche of UEL, nor have any foreign entities been pre-determined to be included in the UEL. Whether a foreign entity will be listed depends on whether it has (1) violated the law of China, (2) taken actions endangering national sovereignty, security or development interests of China, and (3) taken actions like blocking, suspension/discontinuance of supply or discriminatory measures against Chinese Persons, in such ways inconsistent with normal market transaction principles. Any decisions of Listing will be made pursuant to the Provisions and will be publicly announced.[21]

 

8. Several Observations

 

First, it is not uncommon for a country like China to establish regulatory systems like the UEL. The United States (“US”), for instance, maintains, inter alia, the Entity List and the Specially Designated Nationals and Blocked Persons List (“SDN List”). The European Union (“EU”) also maintains a Consolidated Financial Sanctions List. The establishment of the UEL system is thus viewed by a Chinese scholar as a necessary “system improvement”,[22] filling a gap in the Chinese legal system.

 

Second, unlike the sanctions regimes in the US and the EU, which are aggressively applied, the UEL system is introduced as one of defensive nature. The UEL system is to safeguard China’s “national sovereignty, security or development interests” only,[23] but not to further foreign policies. Furthermore, it seems that the UEL system is not designed to safeguard the “national sovereignty, security or development interests” of China in an abstract nature or under random circumstances, but only by way of protection of the legitimate rights and interests of Chinese Persons, i.e. to protect Chinese Persons from serious injuries caused by unnormal suspension/discontinuance of transactions or discriminatory measures by a very few foreign entities.

 

Third, according to MOFCOM, the UEL system will not be applied absent careful considerations. It is emphasized by MOFCOM that “the scope of application of the Provisions is strictly qualified”, the Provisions “only target the very few foreign entities in violation of law” and “the scope will not be enlarged arbitrarily”.[24] MOFCOM also emphasizes that nothing has and will change in respect of China’s opening-up policy, and that China’s opening-up to the outside world will be wider and with higher degree.[25] MOFCOM further emphasizes that nothing has and will change in respect of China’s policy to protect the legitimate rights and interests of all market players (which we understand include also foreign invested enterprises) and, “faithful and law-biding foreign entities shall not worry at all”.[26]

 

Fourth, the operating mechanism and procedures described above also illustrate that the UEL system will be applied with cautions. First, it is the Working Mechanism, instead of any single department, which will make all the decisions. Second, typically there will be an investigation before Listing. The initiation of an investigation will be publicly announced, and the foreign entity concerned will have opportunities to defend its case during the investigation, neither of which have been seen in the sanctions regimes of the US and the EU. Third, a Listing decision is not necessarily followed by Measures. A Grace Period may be applicable, and even in cases the foreign entity concerned fails to rectify its actions, whether to take Measures and which measures to take are still discretionary rather than mandatory.

 

Fifth, the Provisions was promulgated amid the growing tensions between the US and China, but MOFCOM has clarified that the Provisions do not target any specific country or entity.[27] Accordingly, on the one hand, most of the US companies and US-invested enterprises in China shall not worry; on the other hand, companies from a third country should also pay attentions to the Provisions.

 

Finally, although it is not a novel issue for companies operating across multiple jurisdictions to navigate conflicting export controls and sanctions regimes, e.g. the tension between the unilateral sanctions imposed by the US and the blocking regulations of the EU, the promulgation of the Provisions reminds foreign companies doing business in or with China the importance to find ways to ensure compliance with both Chinese and foreign laws.

 

[1] For further information, please contact Qing Ren, Partner of Global Law Office, at: renqing@glo.com.cn.

[2] The English version of the Provisions is available at MOFCOM’s official website: http://english.mofcom.gov.cn/article/policyrelease/questions/202009/20200903002580.shtml.

[3] Article 1 of the Provisions.

[4] Article 2 of the Provisions.

[5] Article 4 of the Provisions.

[6] Article 7 of the Provisions.

[7] Article 5 of the Provisions.

[8] Article 6(1) of the Provisions.

[9] Article 6(2) of the Provisions.

[10] Article 7 of the Provisions.

[11] Article 8 of the Provisions.

[12] Article 9 of the Provisions.

[13] Article 9 of the Provisions.

[14] Article 10 of the Provisions.

[15] Article 10 of the Provisions.

[16] Article 11 of the Provisions.

[17] Article 12 of the Provisions.

[18] Article 13(1) of the Provisions.

[19] Article 13(2) of the Provisions.

[20] Article 13(3) of the Provisions.

[21] See Replies to Journalists’ Questions by the Head of the Department of Treaty & Law of MOFCOM on the Provisions on Unreliable Entity List, available at: http://www.mofcom.gov.cn/article/news/202009/20200903002631.shtml.

[22] See Necessary System Improvement: Replies to Journalists’ Questions by an Authoritative Expert on the Provisions on Unreliable Entity List, an article published on MOFCOM’s website concurrently with the promulgation of the Provisions: http://www.mofcom.gov.cn/article/news/202009/20200903002596.shtml.

[23] This term appears three times in the Provisions, i.e. in Articles 1, 2 and 7.

[24] See Replies to Journalists’ Questions by the Head of the Department of Treaty & Law of MOFCOM on the Provisions on Unreliable Entity List, available at: http://www.mofcom.gov.cn/article/news/202009/20200903002631.shtml.

[25] Ibid.

[26] Ibid.

[27] Ibid.