- Under the Draft Regulations, Export Control Supervision Code will be assigned to all controlled items under the dual-use item control list, and MOFCOM will be equipped with more enforcement tools against those companies with poor control of export control risks.
- This commentary contains suggested amendments to the Draft Regulations and risk and compliance summaries for the exporters in China, and foreign importers and end-users and even re-exporters.
Since the Export Control Law of the People’s Republic of China (“ECL”) came into effect as from December 1, 2020, companies have encountered various export control compliance problems in practice. The existing decentralized administrative regulations and rules, regulating different categories of dual-use items, are no longer suitable for the export control supervision and law enforcement requirements under ECL. On April 22, 2022, the Ministry of Commerce (“MOFCOM”) announced the Draft Regulations on Export Controls of Dual-use Items (“Draft Regulations”), which aim to unify and streamline the export control supervision and enforcement measures. By reviewing the Draft Regulations, companies can understand the trend of export control supervision and law enforcement, which signifies export control risks in practice, will enable companies to take compliance precautions to address those risks.
What follows are our suggested legislative revisions commentary with respect to the Draft Regulations.
1. Scope of Items subject to Export Control
A crucial issue of export controls is whether the restricted and prohibited technologies are subject to ECL. According to Article 2 of ECL, so long as the export control of technologies is related to the maintenance of national security and interests, ECL applies to such technologies, no matter whether it is a dual-use item or not. Given that the technologies as embodied in the Catalogue of China’s Prohibited and Restricted Export Technologies (“Controlled Technologies”) are largely related to national security and interests in a broad sense, an entity or individual, if in violation of the Controlled Technologies, would also be in breach of ECL.
However, the Draft Regulations do not clearly incorporate the Controlled Technologies into the realm of ECL. Article 2 of the Draft Regulations reiterates that the export control of dual-use items shall be subject to the Draft Regulations, and Article 59 further provides that:
“This regulation applies to the export control of other technologies related to safeguarding national security and interests, fulfilling non-proliferation and other international obligations. These technologies shall be regulated by reference to the regulations for dual-use items and included in the export control list of dual-use items.”
To interpret this provision literally, it seems that an item under Controlled Technologies related to national security and interests would not be regulated under ECL unless it is also listed in the export control list of dual-use items. In other words, unless the Controlled Technologies are dual-use items in nature and covered by the dual-use item list, they are not treated under the Draft Regulations as technologies related to national security and interests. However, such interpretation seems inconsistent with Article 2 of ECL.
To align this provision with ECL, we suggest that Article 59 of the Draft Regulations be revised to the effect that:
The Draft Regulations also apply to other items related to the safeguarding of national security and interests, including the technologies under the Catalogue of China’s Prohibited and Restricted Export Technologies, whether or not they are included in the export control list of dual-use items.
2. Definition of Export Business Operator
The control and enforcement measures of ECL primarily focus on the obligations and liabilities of “export business operator” (“EBO”), but the meaning of EBO remains unclear. If the legislators intend to broadly include any entity or person who “exports” controlled items into the scope of EBO, not only including export trading companies with the proper business scope, the Draft Regulations need to so define EBO. Similarly, the meaning of re-exporters needs to be clarified as well.
3. Subsequent Reporting Obligation under Catch-all Controls
Under Article 27 of the Draft Regulations, if, within three years after the export, an EBO finds out that the exported goods, technologies, or services have a risk of falling into the catch-all control scope, it must report it to the competent commerce authority under the State Council in a timely manner.
This is a new provision. It is unclear whether such reporting obligation is also attached to foreign importers, re-exporters, and end-users, and the Draft Regulations need to clarify this point as well.
4. EBO Registration
The Draft Regulations are silent on the issue whether an EBO needs to register with MOFCOM before it can operate the export business of dual-use items. Under Article 11 of ECL, EBOs shall obtain the export business qualifications for relevant controlled items if required by law. Currently, an EBO must register with MOFCOM before it can conduct the business of exporting dual-use items. In its explanations of the Draft Regulations, MOFCOM clearly states that the export business registration requirement for dual-use items is cancelled, except for controlled chemicals and missiles-related items.
5. Export Control Supervision Code
Article 13 of the Draft Regulations provides that the dual-use item control list will assign an export control supervision code (“ECSC”) to each dual-use item, which will significantly benefit the industries. Firstly, by declaring ECSC to Chinese customs for export shipments, EBOs will be able to distinguish export-controlled items from non-controlled items in their declarations. For non-export-controlled items, no ECSC is to be declared. Thus, the ambiguities in declaring merely HS code for controlled goods can be eliminated. Secondly, declaration of ECSC will facilitate Chinese Customs’ determination of the dual-use item nature of the exported goods and thus expedite the export customs clearance. Accordingly, EBOs must have a vigorous export control internal compliance program (“ICP”) in place to make accurate the ECSC identification and declaration.
6. Multiple-use License
Currently, there is no general licensing scheme under ECL. Under Article 23 of the Draft Regulations, a multiple-use license is permitted under some conditions, which hopefully can change the current difficulty in applying for multiple licenses.
We would suggest reducing the application conditions for such multiple-use license, only reserving the condition that the EBO has effectively established and implemented export control ICP, and removing all other conditions under Article 23, such as the length of dual-use export business history and the fixed export sales channels.
The legislators may also consider granting multiple-use licenses for inter-company technology transfers, applications within the same company group, or applications for inter-company R&D purposes, to encourage multinational companies’ R&D activities in China. Certainly, such multiple-use licenses can be granted on the condition that the EBO, foreign importer, and end-user have established an effective ICP for export control compliance purpose and commit to fully cooperate in the verification by MOFCOM or other competent authorities. We hope the Draft Regulations add such a provision.
Please note that under Article 24 of the Draft Regulations, the EBO who has obtained such multiple-use license is required to report the actual use of such license to MOFCOM periodically and accept its inspection.
7. License Exemptions
In Article 25, the concept of license exemption appears for the first time under Chinese national regulations. Such license exemptions are limited to re-export after temporary import for inbound maintenance or exhibition purposes, and temporary export of civil aircraft parts for maintenance purposes. In addition, such limited exemptions are further confined to those EBOs without records of export control penalties during past five years and without records of receiving regulatory interview notifications or warning letters from relevant authorities in relation to their possible export control violations in the past one year. Basically, a clean EBO can possibly be granted with such exemptions.
The license exemptions have not yet covered the following circumstances of technology transfer or license: (a) re-export of technologies or items that were originally imported from overseas affiliated companies; and (b) re-export of the new technologies derived in China from joint R&D efforts using overseas licensed technologies.
We suggest that, to preserve the R&D activities in China and technology inflow, it is necessary to grant license exemptions for the export of foreign basic technologies and new technologies developed therefrom. Also, such exemptions may be conditioned on the establishment and implementation of ICP by both the exporter and recipient/end-user and their commitment to accept the verification by the competent Chinese authorities.
8. Re-export and Re-transfer
Under Article 30, MOFCOM’s approval is required for the change of end-user or end-use of a dual-use item that has been exported. The importer and/or end-user may entrust the original EBO to file applications for such change with MOFCOM. In practice, it is not rare that foreign importers or end-users re-export or re-transfer controlled items imported from China or change the use of controlled items. Therefore, the convenience and practicability of foreign parties’ application for changes should be considered. In particular, they should be permitted to entrust any entity within China (not limited to the original EBO) with the application work. It is not reasonable to grant the original EBO the power to block the foreign importer/end-user’s application for such changes for any reason.
9. End-user and End-use Controls
Article 29 requires the end-users of controlled items to commit in the end-user and end-use certificates that they would not change the use of or re-transfer the controlled items without the Chinese commerce authority’s approval.
In practice, however, there is a common problem that the EBO is unaware of the end-user at the time of application for an export license, when exporting goods to foreign distributors who will distribute the goods to different consumers afterward. To address this problem, we suggest the Draft Regulations be amended to permit the issuance of an export license for “offshore inventory” purposes, without specifying end-user information. To track and verify the end-uses and end-users under such a special arrangement, the Draft Regulations may require the offshore importer to regularly obtain and submit the end-user and end-use certificates for the inventory goods and accept the on-site verification by MOFCOM.
Under Article 51 of the Draft Regulations, the end-user may be subject to a penalty of 5 to 10 times of the amount of illegal business (with a minimum of RMB 200,000) if in violation of its end-user covenant to MOFCOM, which means that the end-users will be on the supervision and enforcement radar of MOFCOM.
10. Third-Party Service Providers
Article 36 prohibits third-party service providers (including foreign entities or persons) from assisting in EBOs’ export control violations by providing services for the illegal export transactions. It additionally provides that a third-party service provider must immediately stop providing relevant services and report to MOFCOM when it discovers the EBO’s violation of export control regulations.
The Draft Regulations also incentivize the establishment of ICP by third-party service providers under Article 52. A third-party service provider in violation of the Draft Regulations may have the chance to receive lighter punishment if it has established and implemented an ICP well to mitigate the consequences of violations.
11. Customs Supervision and Enforcement
According to the Draft Regulations, Chinese Customs will have the following supervision and law enforcement powers:
(a) Not to release the dual-use items if no export license is produced for such items (Article 35). In such case, Chinese Customs will normally initiate an investigation through the Anti-Smuggling Bureau (ASB).
(b) Not to release the goods if they are not declared as controlled items but Chinese Customs suspects that they are controlled items. If MOFCOM confirms the nature of controlled items, Chinese Customs will start the investigation through ASB (Article 38).
(c) To supervise and verify if license exemption registration is consistent with the actual goods. If inconsistent, Chinese Customs will not release the goods and will start the investigation through the ASB (Article 38).
(d) To impose penalties pursuant to ECL and the Draft Regulations (Article 56).
(e) To work with MOFCOM to enforce the ECL and the Draft Regulations and conduct investigations (Article 41).
12. MOFCOM Supervision and Enforcement
Although controlled goods are declared to Chinese Customs, and the Customs has the power to investigate and impose penalties, it seems that MOFCOM will take the lead in export control supervision and investigation. MOFCOM’s supervision and investigation powers are summarized as follows:
(a) To supervise and inspect the export of dual-use items (Article 40);
(b) To assess companies’ internal compliance systems in respect of export control, which may aim at detecting the risk of violations and identifying clues to violations (Article 7);
(c) To initiate regulatory interviews with or issue written warnings to relevant entities or individuals with export control non-compliance risks (Article 44);
(d) To investigate violations of ECL and/or the Draft Regulations (Article 40); and
(e) To impose penalties on export control violations except for the incorrect declaration of exported goods which falls into the power of Chinese Customs (Article 56).
The Draft Regulations empower MOFCOM to coordinate with the foreign affairs, national security, customs, and other relevant authorities to enforce the export control law and unify enforcement efforts by organizing, guiding, and coordinating with relevant national and local authorities. Accordingly, other relevant authorities must assist MOFCOM in the law enforcement process within their respective scopes of authority. This will increase the exposure of EBOs, foreign importers, and end-users of governmental queries, interviews and investigations. Considering that ASB of Chinese Customs has the authority of criminal investigation, MOFCOM will most likely join the Customs in its enforcement efforts and dawn raids, administrative and criminal.
13. Reduction of Penalties
Under Article 52 of Draft Regulations, an EBO or third-party service provider can be granted penalty reduction if it takes timely remedial measures to mitigate the violations, takes the initiative to disclose violations, and/or cooperates with the authorities in the investigation. If an ICP is in place and “runs well to prevent the enlargement of harmful consequences of the violation,” MOFCOM may, at its discretion, impose a lighter penalty. However, the occurrence of the violation itself seemingly contradicts the conclusion that the ICP runs well. Therefore, we suggest that the wording “runs well” be replaced with “is implemented at a corporate level.”
14. Export Control by Foreign Governments
Article 45, Paragraph 1 of the Draft Regulations reiterates that any outbound provision of information relating to the export control of dual-use items must be carried out according to applicable law. Such information shall not be provided if the provision may endanger national security and interests.
The wording of this article is quite ambiguous and confusing. Suppose that I provide training or lectures on ECL to foreign audiences, what I provide to foreign audiences is obviously information related to export control of dual-use items. Thus, according to this article, I need to find out whether any law authorizes me to do so before I can give the training or lectures. Otherwise, I will find myself in violation of ECL or the Draft Regulations. This is obviously an absurd result. The Draft Regulations must limit its application to certain given circumstances, for instance, to the provision of the data or technical information of a given controlled technologies to overseas or foreign citizens.
Article 45, Paragraph 2 further provides that without the consent of MOFCOM, Chinese citizens, legal entities, and other organizations may not commit to accept or accept export control on-site interviews or investigations conducted by foreign governments. We fully understand the legislative intent of this provision but suggest clarifying that "on-site interviews or investigations” here refer to those conducted “under any foreign law.”
(a) Enforcement trends
The Draft Regulations signal the enhancement of law enforcement of export controls. MOFCOM's powers of supervision and inspection, compliance assessment, regulatory interview, written warning, investigation of violations, and imposition of penalties, as well as its joint law enforcement with the Customs having criminal investigation authority, all these enforcement tools imply significant liability risks to EBOs, third-party service providers, foreign importers, and end-users.
(b) ICP for export control compliance
The enforcement trends necessitate the setup and implementation of ICP for export control compliance under Chinese law. Such ICP, as a minimum, must embody the following parts:
(i) Identification and management of ECSC and HS codes for controlled items;
(ii) End-user and end-use due diligence;
(iii) Due diligence screening of foreign importers and end-users against China export control lists and sanction lists;
(iv) Red flag identification and resolution before proceeding with a given export transaction; and
(v) Blocking of risky export transactions of controlled items.
 For example, Regulation of the People's Republic of China on the Administration of Chemicals Subject to Supervision and Control, Regulations of the People's Republic of China on Control of Nuclear Dual-Use Items and Related Technologies Export, Regulation of the People's Republic of China on Controlling the Export of Guided Missiles and Related Items and Technologies, Regulations of the People's Republic of China on Controlling the Export of Dual-purpose Biological Products and Affiliated Equipment and Technologies, and Measures for Controlling the Export of Relevant Chemical Products and Affiliated Equipments and Technologies.