The Draft Export Control Law of PRC (2019) (“New Draft”) was released on December 28, 2019 by the National People's Congress (“NPC”) for comments from the general public. Compared with the 2017 draft by MOFCOM (“Old Draft”), the New Draft narrows and clarifies its scope of extraterritorial jurisdiction by deleting the re-export control provision on foreign-made products, confining sanctions against foreign importers and end-users as put on the controlled party list to the prohibition of exporting business operators in China (“EBO”) from transacting with such controlled parties, without forbidding third foreign persons or entities’ transactions with such controlled parties. In this respect, Chinese government exhibits self-restraint facing the trade war with the United States which is still somewhat smoking. The New Draft thus dissolves the strong US export control flavor as contained in the Old Draft.
The New Draft keeps EBO as the focus in its enforcing measures in terms of minimum penalty elevation, publicization of administrative penalties on the national company credit information platform, export denial for 5 years, business suspension and export monopoly charter revocation in different scenarios. Under the New Draft, EBO in China undertake the legal obligation to formulate and implement an internal compliance control program for export control. If EBO fail to fulfill such obligation, they may face accumulation of huge legal risks and even criminal liabilities. As for the deemed export, R&D centers in China involving experts of different nationalities will face uncertainty risks, which may lead to the divestiture of R & D centers out of China.
On December 28, 2019, the Export Control Law of PRC was officially put into NPC’s legislative process. On the same day, the fifteenth meeting of the Standing Committee of the thirteen NPC deliberated on the Draft Export Control Law of the People's Republic of China and released the same on the NPC official website on the same day to seek public opinions. Nearly two and a half years ago, MOFCOM published its Old Draft on June 16, 2017. The differences between the New and Old Drafts and our commentary are as follows:
I. Legislative Objectives
(a) Prevailing international obligations
Different from the Old Draft, the New Draft puts “fulfilling international obligations such as those of nonproliferation” before “safeguarding national security and interests " to emphasize the legislative purpose of implementing the multilateral international mechanisms to which China is a party. This is consistent with China's position to solve security problems through multilateral mechanisms and refrain from unilateral sanctions as much as possible.
(b) Issues of national interest
The New Draft deletes the reference of securing national development interests as one of the legislative objectives while adding the national interests as a new objective. We welcome the deletion as it is rather confusing how to safeguard the national development interests through export control. We believe that the essence of export control is to safeguard national security while sacrificing some development (commercial) interests may be inevitable. The national development interest is only one of considerations of whether and how certain export is controlled.
Apart from national security it is not easy to follow what national interests can be advanced through export control, and no further reference of national interests appears in other provisions of the New Draft, leaving “national interests” as a lonely island of isolation. We propose not to use national interests as the legislative objective.
We understand under US export control regime foreign policy interests are one of the purposes of their export control. However, advancing foreign policy interests without national security element, as it often means aggressive unilateral sanctions, does not seem to be an option for China export control legislation.
II. Retaliation
The Old Draft authorizes retaliation measures against the countries (regions) that take discriminatory export control measures against China. The New Draft does not contain such a provision. Retaliation provision is not necessary under export control as China can use the country list under the New Draft to achieve the same goal.
Draft 2019/New Draft | Draft 2017/Old Draft |
N/A | Article 9 [Principal of Equivalence] In the event that any country (region) takes discriminatory measures in respect of export control against the People's Republic of China, the People's Republic of China may take the corresponding measures against such country (region). |
III. Inter-department Coordination Mechanism
The Old Draft is to strengthen the coordination of export control by different governing state departments. The New Draft aims at establishing a coordination mechanism for export control administration, which literally means a steering committee and a shared export control supervision platform. Under such a mechanism, controlled party list and control measures will be integrated, which makes it easier for MOFCOM and the customs, for instance, to detect, investigate and penalize export control violations.
IV. Compliance Obligations
The Old Draft encourages EBO to establish an internal control system, without which the granting of the export license may be negatively affected. Under the New Draft, EBO are obliged to establish the internal export control system. Though under the New Draft, such internal control system is only a condition to enjoy licensing facilitation, our experience tells that with such an express compliance control obligation in place, the failure to fulfill such obligation may possibly results in accumulating huge legal risks and even amounts to an intent to evade export control and thus triggers criminal liabilities.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 14 The exporting business operators shall establish the internal compliance review system of export control. Where the exporting business operators' internal compliance review system operates well and no major violations of law are recorded, the export control administrative departments may provide corresponding facilitation measures in licensing to its export-related controlled items. Specific measures shall be formulated by the export control administrative departments. | Article 36 [Encouragement concerning the Internal Compliance Mechanism] The State encourages companies to establish internal compliance mechanism for export control, and may provide corresponding facilitation in licensing. |
V. Administrative Review as Final Remedy
For the administrative decision not to grant license, the New Draft makes it clear that the administrative review if applied for is the final remedy. For other administrative decisions, such as penalty for violations, litigation after the administrative review is still possible.
VI. Re-export of Foreign-made Products
The Old Draft identifies foreign-made products as controlled if containing China controlled items and exporting the product to another foreign country may require a license from Chinese government. The New Draft does not contain such a provision, which may mean that China no longer controls the re-export of foreign-made products (possibly except for China controlled items simply processed in a foreign country). This is a rational approach. After all, the re-export control of foreign-made products is difficult to enforce and may harm the export markets of Chinese products.
Draft 2019/New Draft | Draft 2017/Old Draft |
N/A | Article 64 [Re-export] This Law shall apply to the controlled items or foreign-made products which contain items controlled by the People's Republic of China with values thereof at or above the designated proportion that export from abroad to other foreign countries (regions). The proportion of value as specified in the preceding paragraph and the administrative measures in this regard shall be stipulated by the State Council or the Central Military Commission separately. |
VII. Deemed Exports
Article 2 of the New Draft retains the provisions on deemed export, and the transfer of controlled items from Chinese citizens or entities to foreign citizens or entities is deemed as export and subject to export control. This provision will cause difficulties for technological cooperation between persons of different nationalities as far as dual-use or nuclear items are concerned, and in particular R & D activities of multinational companies in China will face uncertainty risks. Legislators must consider appropriate exceptions to deemed export control, such as automatic general license scheme for such R & D activities, except for R&D activities relevant to prohibited technologies for export.
VIII. Country List
According to Article 8 of the New Draft, different control levels may be adopted for different countries of destination if the risk levels are different. In conjunction with Article 10, the state may make and release a country list under the New Draft, specifying different export control measures.
IX. End-users and End-uses
The New Draft fails to formulate what responsibilities EBO and importers of the dual use or nuclear items must take on the issues of end-users and end-uses. According to the New Draft, (a) EBO or importers who discover that the end-user or end-use is likely to be altered have to report to Chinese authority, and (b) foreign importers who violate their end-user or end-use commitments will be subject to enlisting on the controlled party list. However, since it is only the end-users rather than the importers who are obliged to make end-user or end-use commitments according to the New Draft, how could the importers violate the so-called end-user or end-use commitments? According to Article 17 of the New Draft, relevant certification can be issued by the government of the relevant country or region and in such a case, the relationship between such government certification and the end-user commitments as required by Article 18 needs to be clarified.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 17 The exporting business operators shall submit end-user and end-use certification to the export control administrative departments, and relevant certification shall be issued by the end-user or the government agency of the country or region where the end-user is located. | Article 25 [End-user and End-use Certification] The export control administrative departments may, depending on the sensitivity of controlled items and end-users, request exporters to provide end-user and end-use certification and other forms of proof materials issued by importers or relevant government sectors or forces of import countries (regions). |
Article 18 The end-user of the controlled items shall make commitment that, without approval of the export control administrative departments, it shall not alter end-use of products or transfer products to any third party. Any exporting business operators or importer who discovers that end-user or end-use is likely to be altered shall immediately report to the export control administrative departments. | Article 26 [Commitment of End-users] The Importer shall make commitment according to the law that, without approval of the export control administrative departments, it shall not alter end-use of products or transfer products to any third party other than end-users. Article27 [The reporting obligation of the exporter operator] When an export contract is signed by the export operator, end-user or end-use shall be reviewed when necessary. Once discovering that end-user or end-use is altered after export, the export operator shall immediately report to the national export control departments. |
X. Controlled Party List
Under the New Draft, foreign importers and end-users in violation of the New Draft will face consequences of being put into the controlled party list, and EBO may not be allowed to deal with such controlled parties. This may imply that transactions between foreign third parties and the controlled parties are not controlled, even if transactions involve an item that is subject to China export control. This feature is distinctive from the US export control practices.
Please note that the New Draft recognizes potential harm to national security as one of the reasons for entries into the controlled party list, regardless of whether foreign importers and end-users have violated export control measures. This may signify unilateral discretional sanctions against foreign persons or entities, which deserves attention of foreign companies.
XI. Enforcement by the Customs
For tangible controlled items, the customs are the most critical enforcement department.
(a) Export good certification request or query
According to Article 21 of the New Draft, the customs have the power to request certification from export control administrative departments or raise queries to EBO regarding the goods for export. To avoid possible export trade disruption, the customs can only do so when "the customs have evidence that the goods for export may fall within the scope of export control ". Pending the certification or query, the goods for export will not be released by the customs.
In the case of such certification, the customs will act according to different certification conclusions. However, if the customs raise query to EBO for the goods for export, the customs can dispose of the case according to its own conclusion. This provision is confusing. In practice, the customs normally face issues whether the goods for export fall under the control lists or whether the declared tariff code is one on such control lists. In the former case, it is the power of export control administrative department (e.g. MOFCOM) to determine whether the given goods fall under the control lists; in the latter case, the customs will decide by its own the true tariff code and whether its tariff code falls under the control lists; if the tariff code so falls, the customs have the power to dispose of the case. However, if EBO do not agree that the same goods are subject to export control and no licensing is necessary, the EBO currently have the right to consult MOFCOM. It is not appropriate to deprive EBO of such a consultation right.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 21 When exporting controlled items, consigners of export goods or customs brokers shall present the licenses granted or relevant certification of licensing facilitation measures issued by the export control administrative departments to the customs for verification, and go through customs formalities in accordance with the relevant provisions of the State. Where consignors of export goods fail to present the licenses granted or relevant certification of licensing facilitation measures issued by the export control administrative departments to the customs for verification, and the customs have evidence that the export goods may fall within the scope of export control, the customs shall propose identification to the export control administrative departments or raise queries to the consignors of export goods, and shall dispose in accordance with the identification conclusion of the export control administrative departments or the conclusion of the query made by the customs. The customs shall not release the export goods during the period of the identification or the query. | Article 30 [Customs Formalities] When exporting controlled items, consigners of export goods or customs broker shall present the licenses granted or expert opinions issued by the export control administrative departments to the customs for verification, and go through customs formalities in accordance with the relevant provisions of the State. |
(b) Expansion of customs jurisdiction
Under Article 41 of the New Draft, the customs have the jurisdiction over any violation of the Export Control Law if discovered by the customs and may impose penalties under the Export Control Law or the Customs Law if the Export Control Law is silent on the given issues. Under the Old Draft, the customs will only have jurisdiction if the violation occurs in customs supervision areas, which is a much narrow scope. Under the current export control scheme, the customs can only impose penalties prescribed under the customs laws. It is foreseeable that the customs will strengthen the export control and supervision of export goods if the New Draft becomes law, and companies will face more risks of customs penalties.
XII. Elevation of Minimum Penalties
(a) Violations of license requirements
According to the provisions of the New Draft, the EBO who violate the monopoly charter requirements, or export the controlled items without licenses, or export the controlled items beyond the scope of license, or export the prohibited items, will be “concurrently” imposed with a penalty of at least RMB500,000. According to the Old Draft, such illegal act will be imposed with a "warning", "confiscation of illegal gains" and a penalty of at least RMB50,000 concurrently. For such violations, the minimum of the penalty under the New Draft is ten times of the amount under the Old Draft.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 34 Where the exporting business operators exports the controlled items in violation of the requirements of export monopoly license, the export control administrative departments shall give a warning, order to stop the illegal act, and confiscate illegal gains, and where the illegal business revenue is not less than RMB500,000, a penalty of not less than five times but not more than ten times the illegal business revenue shall concurrently be imposed, and where no illegal business revenue is gained or the illegal business revenue is less than RMB500,000, a penalty of not less than RMB500,000 but not more than RMB 5 million shall concurrently be imposed. | Article 51 [Unlicensed Export] Where any exporting business operators commits any of the following acts, the export control administrative departments shall issue a warning depending on the seriousness of the case and impose a penalty of not less than five times but not more than ten times the illegal business revenues; where the illegal business revenue is less than RMB50,000, a penalty of not less than RMB50,000 but not more than RMB500,000 shall be imposed; any illegal gains derived therefrom shall be confiscated. For persons directly in charge and other persons directly held liable, a warning shall be given and a penalty of more than RMMB100,000 but less than RMB300,000 shall be imposed:1. Exporting controlled items without filing a record or obtaining the export monopoly license; or2. Exporting controlled items without the relevant licenses; or3. Exporting controlled items beyond the scope of licenses; or4. Exporting controlled items specified on the list of prohibited exports. |
Article 35 Where any exporting business operators commits any of the following acts, the export control administrative departments or the customs shall order to stop the illegal act, and confiscate illegal gains, and where the illegal business revenue is not less than RMB500,000, a penalty of not less than five times but not more than ten times the illegal business revenue shall concurrently be imposed, and where no illegal business revenue is gained or the illegal business revenue is less than RMB500,000, a penalty of not less than RMB500,000 but not more than RMB5 million shall concurrently be imposed; where the circumstances are serious, the customs shall order to suspend business for rectification or even revoke the export monopoly license:1. Exporting controlled items without the relevant licenses; or2. Exporting controlled items beyond the scope of licenses; or3. Exporting controlled items specified on the list of prohibited exports. |
(b) Violations in obtaining and using the license
Under Article 36 of the New Draft, the penalty becomes "not less than RMB 0.2 million but not more than RMB 2 million" from the previous "not less than RMB50,000 but not more than RMB 0.5 million" under the Old Draft, which is imposed for the acts of illegally obtaining, disposing of or transferring the license if there is no illegal gains can be proved.
XIII. Assists to export control violations
Apart from EBO, any other party who assists in violations of export control on the part of EBO or the foreign importer, will be subject to penalty under the New and Old Drafts. Under the New Draft the range of penalty is adjusted and the penalty for personal liability is cancelled. The New Draft adds one condition for the third party’s liability in such assists, that is, the knowledge of the violation of export control law. Such knowledge in practice may include the constructive knowledge of "should have known" nature. It is also likely that third party service providers are exposed to a joint crime of knowingly providing assistance to violations of export control law. Therefore, the trade-related service providers must also need to take compliance measures in advance to prevent legal risks for such assists.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 37 Where any party knowingly provides agency, freight, delivery, customs declaration services, third-party electronic trading platforms and financial services for Export control violations, the export control administrative departments or the customs shall give a warning, order to stop the illegal act, confiscate the illegal gains, and where the illegal business revenue is not less than RMB100,000, a penalty of not less than three times but not more than five times the illegal business revenue shall concurrently be imposed; where no illegal business revenue is gained or the illegal business revenue is less than RMB100,000, a penalty of not less than RMB100,000 but not more than RMB500,000 shall concurrently be imposed. | Article 54 [Collusion, Conspiracy, Offer of Convenience and Other Illegalities] Where any party abets or conspires to commit any export control violation, or provide agency, freight, customs declaration services, third-party electronic trading platforms and financial services for this purpose, the export control administrative departments may, depending on the circumstances, give a warning, and impose a penalty of not less than five times but not more than ten times the illegal business revenue; where the illegal business revenue is less than RMB50,000, a penalty of not less than RMB50,000 but not more than RMB500,000 shall be imposed; any illegal gains derived therefrom shall be confiscated. For persons directly in charge and other persons directly held liable, a warning may be issued and a penalty of not less than RMB100, 000 but not more than RMB300, 000 may be imposed. |
XIV. Transactions Prohibition with Controlled Party List
The EBO who transact with the parties who are on the controlled party list will be subject to the minimum of penalty of RMB500,000, 10 times of the penalties under the Old Draft, and in serious cases, the business of EBO will be suspended or even fully terminated with their business license revoked.
XV. Suspension of Business or Revocation of Export Monopoly License
These are very severe punishments that will seriously affect EBO’s business operations. According to the New Draft, EBO may be ordered to suspend business or the export monopoly charter may be revoked under the following two situations:
(1) Exporters refuse or interfere with the regulatory inspection; or
(2) Exporters trade with entities and individuals on the controlled party list.
It is bit strange that revocation only applies to export monopoly charter. We suspect that the words in Chinese出口专营许可(export monopoly charter) originate from an improper translation of “export privilege” under US export control scheme, and it should be replaced by “export business license” 出口业务许可and therefore the export business license may be revoked as well in serious cases.
Draft 2019/New Draft | Draft 2017/Old Draft |
Article 39 Where the exporting business operators refuses or interferes with the regulatory inspection, the export control administrative departments or the customs shall give a warning, and a penalty of not less than RMB100,000 but not more than RMB300,000 shall be imposed; where the circumstance is serious, the export control administrative departments or the customs shall order to suspend business for rectification or even revoke the export monopoly license. Article 38 Where the exporting business operators violates the requirements of the measures specified in the second paragraph of Article 20 of this Law, the export control administrative departments shall give a warning, order to stop the illegal act, confiscate the illegal gains and where the illegal business revenue is not less than RMB500,000, a penalty of not less than ten times but not more than twenty times the illegal business revenue shall concurrently be imposed; where no illegal business revenue is gained or the illegal business revenue is less than RMB500,000, a penalty of not less than RMB500,000 but not more than RMB5,000,000 shall concurrently be imposed; where the circumstances are serious, the export control administrative departments shall order to suspend business for rectification or even revoke the export monopoly license. | Article 57 [Interference with Investigations] Where the exporting business operators refuses the regulatory inspection, interferes with the investigation or commits fraud in the middle of an investigation, the export control administrative departments may give a warning, and where the circumstance is serious, a penalty of not less than RMB100, 000 but not more than RMB300, 000 shall be imposed. For persons directly in charge and other persons directly held liable, a warning shall be given and a penalty of not less than RMB100,000 but not more than RMB300,000 shall concurrently be imposed. |
XVI. Personal Liabilities
For the persons in charge of the export control matters and other persons who are directly responsible for the violations, the New Draft cancels their personal liabilities, but adds new possible consequence of prohibiting them from engaging in the relevant export business within five years provided the EBO are penalized for export control violation, or prohibiting those who are subject to criminal liability due to the violations of export control from engaging in the relevant export business activities for lifetime.
XVII. Conclusions
1. Against the background of the trade war between China and the United States, the Chinese governments shows self-restraint in the New Draft in that the foreign-made products do not appear under export control, only EBO in China rather than other foreign companies or persons are prohibited from dealing with the controlled parties, and the blacklisting risks of foreign importers and end-users are largely dependent upon whether they have duly performed their written covenants to the Chinese government. The New Draft thus narrows the scope of its extraterritorial jurisdiction, distinct from the excessive extraterritorial jurisdiction practices of the United States.
2. It follows that the control focus of the New Draft is on EBO, who will face more risks of investigation, punishment and even criminal consequences. Under the New Draft, law enforcement agencies will be more effective in management and supervision through the inter-departmental coordination scheme.
3. Nevertheless, legislators must pay attention to the provisions of deemed export. The deemed export may have a negative impact on the R & D activities in China of multinational companies. It is desirable for the legislators to take a flexible approach to reduce or eliminate such negative impact, so as to avoid large-scale divestiture R & D businesses from China.
4. Foreign companies also need to watch out for the national security reasons for the controlled party list. Such a provision sounds like the entity lists under US export control scheme where potentially endangering US national security or foreign policy interests will be the reason for such blacklisting. Though the consequences differ from China controlled party list, foreign companies may need to consider risks of engaging in any sensitive activities that may be treated as repugnant to the national security of China.
5. It is worth noting that, following the legislative process, the contents of the New Draft may continue to change or have different interpretations. Perhaps because of legislative techniques or strategies, some contents of the Old Draft are not mentioned in the New Draft, and some contents of the Old Draft may reappear in the implementation regulations of the export control law in the future.