News
Global Reach, Local Insight
On 28 December 2019, the National People’s Congress (“NPC”), the highest legislative body in China, published a new draft of the Export Control Law (“ECL”) to solicit public comment. It will establish a unified export control regime and change the existing landscape with the rules for export control scattered in various laws and regulations1, i.e. the Foreign Trade Law, the Customs Law, as well as lists for forbidden or restricted export. Among other matters, the long-awaited ECL is expected to delineate what items and conducts are subject to export control, how the control and licensing system will be handled, and how to coordinate different enforcement agencies.
While bearing significant resemblance to its counterpart in the US or EU, ECL shows that China’s export control system is unique in many aspects. For example, it has a narrower scope of controlled items, which seemingly excluded civil use items and foreign-made items. It applies a catch-all provision which might lead to uncertainty, yet consultation with the authorities is available to help solve the problem. Another example is that it requires all exporting businesses to adopt internal compliance review program, though some has argued that the incentives for effective implementation of such a program is not sufficient. In addition, a flexible mechanism of “temporary control” is applied, of which the function is similar to export control lists.
In 2017, the Ministry of Commerce (“MOFCOM”), one of the enforcement agencies for export control, released the first draft of the ECL. After seeking public opinions, the draft was further amended. So far, the 2019 draft ECL has passed its first review by the NPC. Due to the coronavirus outbreak, the next session of the NPC was postponed, which might affect the legislative process of the ECL but the impact may not be significant. Overall, it is unlikely to see significant changes to the 2019 draft ECL. It is advised that companies could rely on the current draft to prepare for the new export control regime in China.
China has been seen as an important player in global supply chains. Nonetheless, over the years China has been focusing on its economic structural transformation with large investment in the R&D activities and hi-tech sectors. It is one of the reasons why the legislation of export control law is put on the agenda. The ECL will be the first comprehensive and consolidated export control legislation in China. This article is intended to give an overview of the coming export control regime in China and highlight the new compliance requirements under the 2019 draft ECL.
The 2019 draft ECL proposed significant changes to the current export control regime in China in the controlled items and conducts. Under the 2019 draft ECL, the controlled items include the goods, technologies, or services characterized as (i) dual-use; (ii) military products, (iii) nuclear, and (iv) items otherwise related to the performance of international obligations and protection of national security. The scope of controlled items is similar to the export control regimes around the world.
Other than the enumerated items, the 2019 draft ECL also has a catch-all provision to cover unlisted items. According to Article 15, it is also subject to the ECL if the unlisted items may (i) endanger the national security, (ii) be used to design, develop, produce, use, transport weapons of mass destruction, or (iii) be used for the purposes of nuclear, biological or chemical terrorism. In addition, the catch-all provision will also include the items designated by the temporary control mechanism. The relationship of the two mechanism will be further discussed below.
The catch-all provision might bring uncertainty, but a consultation process with the authority is also provided in the 2019 draft ECL to reduce such uncertainty. Similar to the approach in the US, an exporter is allowed to make an inquiry to the export control authority when the exporter is unable to determine whether the goods, technologies or services fall under the scope of controlled items under the ECL. The export control authority shall respond to the inquiry promptly and timely. It is to balance the catch-all provision and will be very useful for the smooth operation of trading or exporting businesses.
The conducts subject to the 2019 draft ECL are defined to include (i) a transfer of controlled items from the territory of China (“Export”), (ii) a provision of controlled items by Chinese citizens, legal persons or other entities to foreign natural persons, legal persons and other entities (“Deemed export”), and (iii) a re-export, transit, transshipment or export from areas under special supervision by the customs.
The second type of export conduct subject to the 2019 draft ECL is similar to the notion of “deemed export” under the US Export Administration Regulations (“EAR”). It is indicated that the transfer of controlled items by a Chinese person or entity to a foreign person or entity within the territory of China or even in a third country is subject to the export control regime in China. The “re-export” appears in Article 45 of the 2019 draft ECL together with transit, trans-shipment and export via special customs supervision areas. However, the 2019 draft ECL has not yet given a clear definition to Re-export. The deletion of the de minimis rule in the 2019 draft ECL indicated that the re-exports of foreign-made products with controlled content may not subject to the ECL regime in China. Further clarification remains to be made with possible implementing rules.
Similar to other major jurisdictions such as the US and the EU, the main control mechanism consists of the adoption of export control lists and a licensing system. Under the 2019 draft ECL, country lists and control lists will be issued, specifying what is forbidden/restricted to be exported to where . The countries or areas in the country lists will be in different risk levels. The items in the control list are strictly administered through the licensing mechanism.
First, a country list will be published based on different levels of risks in different countries and areas. It is a similar mechanism to the Commerce Control Chart (“CCC”) under the US EAR. The export control authority in China will draw a country list based on the proliferation risks, terrorism and the national security. As there are several groups in the US CCC with different risk levels, the specific layout of Chinese versions remains to be seen.
Second, when it comes to controlled item list, there will be at least three lists, which are respectively of dual-use items, military items, and nuclear items, rather than the only list under the EAR in the US (Commerce Control List, “CCL”).
Third, the abovementioned lists will be enforced in combination with a licensing system. Before engage in the exporting business, the business operators shall obtain permission from or filing with the competent authorities. After that, the exporters of any controlled items listed shall submit an end-user and end-use certificate and apply for the license from the export control authority. The authority will review and decide whether to grant such a license. Furthermore, the obligation to apply for a license also arise when (i) the exporters know, should know, or receive the notice from the export control authority that the items to be exported are not in the lists but are controlled under the ECL; or (ii) the end-users transfer the items controlled to any third-party or change the end-uses.
The 2019 draft ECL also introduces a blacklist and a temporary control mechanism, which collectively fulfill the function of various lists in the US export control regime, such as the Entity List, Denial Persons List, SDN list, etc. The export control authority will maintain a blacklist of exporters or end-users who violate the end-user and end-use commitment, who is likely to endanger national security, or who use the controlled items for terrorism. The entities in the blacklist are prohibited or restricted from involving in any transactions related to the controlled items.
In addition, Article 10 of the 2019 draft ECL establishes a temporary control mechanism, which allows a duration of control up to two years. The temporary control is restriction of items outside of the export control lists. It allows more flexibility for the export control authority in the enforcement. However, it is not clear whether the temporary control could be renewed when expired under the 2019 draft ECL.
The scope of controlled items in the provisions of the 2019 draft ECL is narrower than the EAR in that civil use items and foreign-made items are excluded. The items subject to the EAR include all the items originating from the US which are solely for civil use and most of which may be classified as EAR99. However, the controlled items under the 2019 draft ECL seem not to include the items made in China that are solely for civil use. Furthermore, the rules for the re-export of items incorporating controlled content exceeding the de minimis level that appeared in the 2017 draft are now removed from the 2019 draft ECL. The foreign-produced items with Chinese parts or technologies might not be subject to the ECL.
It is clearly provided in the 2019 draft ECL that an export control compliance program is mandatory for the parties engaging in the exporting business, as opposed to the 2017 version where it was just encouraged for the parties to build a compliance program. In the US, neither the Bureau of Industry Security nor the Office of Foreign Assets Control said that a compliance program is mandatory, but an effective compliance program will be considered to mitigate a civil monetary penalty by the US export control authorities upon violation. Under the 2019 draft ECL, whether the compliance program could serve as defense against violation of the ECL is not clear. Nonetheless it is stipulated that if its internal export compliance program is effective and there is no major violation on the record, an export may be able to receive certain facilitating benefits regarding the export licensing.
A coordination mechanism and an expert advisory mechanism will be set up at the state level according to the 2019 draft ECL. The current enforcement authorities of the export control in China are divided among several government authorities, including Central Military Commission, MOFCOM, Customs, China Atomic Energy Authority and Ministry of Industry and Information Technology. The 2019 draft ECL does not change the current administration system and division of responsibilities, but introduces a working coordination mechanism at the state level and an expert advisory panel for export control. The State Council and the Central Military Commission would become the leading authorities. On the other hand, the Customs will have the power to verify, investigate, and punish under Article 21 and Article 41 of the 2019 draft ECL. Powerful and active export control enforcement can be expected after the enactment of the ECL.
Most of the liabilities in the 2019 draft ECL are imposed on the Export Business Operators (“EBO”)2. The 2019 draft ECL increases penalty for violations compared with the 2017 draft. The violations of licensing requirements could result in confiscation of illegal gains, and an administrative fine. The range of fine amounts to five to ten times the value of the illegal turnover. Furthermore, for transacting with blacklisted entities, the fine can be as high as ten to twenty times of the illegal turnover. If the illegal turnover of the violation is less than CNY 500,000 (approx. USD 71,000), the fine imposed shall be from CNY 500,000 (approx. US$71,000) to CNY 5 million (approx. US$710,000). In a serious case, the business operation will be suspended and even the relevant exporting certificate will be revoked.
It is also a violation under the 2019 draft ECL for any party to provide agency services, freight, delivery, customs declaration, e-commerce platform, financial services or other services with the knowledge that there is a violation of the ECL. In addition to the confiscation of illegal gains, the fine imposed on the parties who provide such services will be three to five times of the illegal turnover. If the illegal turnover is less than CNY 100,000 (approx. US$14,000), the range of fine shall be from CNY 100,000 (approx. US$14,000) to CNY 500,000 (approx. US$71,000). It is unlikely for foreign natural persons to get the export qualification and registration of sensitive items and then to engage in the export business of controlled items. However, foreign natural persons will also be affected if they are employed by the EBOs as persons directly in charge of the export control violations, or if they knowingly provide aforesaid third-party intermediary services to the violations.
In addition, any violations of the ECL mentioned above will be publicized and recorded on the national credit information sharing platform, which may lead to huge damage to the goodwill of a company. Besides, the export control authority may deny the license application submitted by a party within five years after it is penalized.
The 2019 draft ECL also provides very serious consequences for individuals involved, though not monetary penalty. The principal directly in charge or other persons directly responsible for the violation will be prohibited from engaging in exporting businesses for five years, or even for life if they are convicted of criminal charges.
Where a violation of the ECL constitutes smuggling, criminal liability will be pursued in accordance with the Criminal Law. According to Article 151 and Article 155 of the Criminal Law, smuggling other articles the export of which is prohibited can result in a criminal fine. The principle directly in charge or other persons directly responsible for the conduct will be sentenced for up to 5 years in prison, and even more than 5 years in a serious case. The administrative liability did not provide any immunity to the criminal liabilities.
It remains to be seen whether the ECL will be passed in its current draft, and how these control measures will be landed in the implementing regulations and guidelines. For those who are doing business in China and out of China, it is advised to watch closely the legislative process in China, especially for those multi-national corporations (“MNCs”). In the past, due to the tight export controls in the US and the EU, some MNCs may choose to place their plants in China, and then sell products in China or re-export to third countries. These MNCs may need to consider the potential application of the Chinese ECL. For those covered, compliance obligations not only include to prove end-use and end-user, but also the requirement of license applications for the items unlisted but controlled, and the reporting obligations for any awareness of the changes in end-use or end-users.
Furthermore, as we can see, not only exporters or re-exporters, but also providers of intermediary services, such as banks, freight forwarders, e-commerce platforms, etc., could be affected by the law. The liabilities for facilitating violations highlight the risks for companies who provide services to international trading or exporting business. It shall raise the concerns of many international logistic companies, which perform an essential part in the global supply chain to deliver the products made in China to every corner in the world. It is also emphasized to conduct a third-party compliance investigation into the counterparties, to prevent the risk of knowingly facilitating illegal transactions or trading with the parties in the blacklist.
If we compare the 2019 draft ECL with the export control rules in other jurisdictions, there seem not to be sufficient incentives for exporting businesses to build up an effective compliance program in China under the draft. The export compliance program is mandatory, yet an effective compliance program brings no obvious surplus but facilitating license applications. It may be not enough to encourage the businesses to constantly enhance their compliance program and to thoughtfully implement it. It is possible to induce businesses to introduce a compliance program just in paper, which cannot prevent the violations in fact.
Therefore, we suggest to add more incentives for an effective compliance program under the ECL. For example, it could be a mitigating factor against penalty decisions. A procedure similar to leniency program could also be considered which can encourage companies to self-report violations and adopt active remedies. After all, the effectiveness of compliance and implementation in controlling export items is the ultimate goal of the ECL.
What can we do for you ?
Contact Us +
Copyright ©2025 DACHENG | All Rights Reserved
