NewDevelopmentsonExportControlinChina

The newly drafted Export Control Law of China (the “Draft”) has been published for public commentary on December 28, 2019. This is the first time for China to draft a law on export control. Export control is to prohibit or restrict the export of certain items such as nuclear, biological products or weapons in order to fulfill international obligations of non-proliferation, safeguard national security and development interests. Currently, there are several administrative regulations with respect to export control, respectively focusing on chemicals, nuclear, nuclear dual-use items, missiles, military products, biological products (the “Current Regulations”). Compared with the Current Regulations, the Draft does not change the current regulatory frame and the division of competent departments; it improves the regulatory measures and fills the gap in Current Regulations. This article will highlight the changes on export control and the possible impact for companies with business in China.
1.The scope of controlled items enlarged
All the objects subjected to export control in the Draft are collectively referred as items, including goods, technologies and services. The controlled items are enlarged in the Draft.
First, the scope of the controlled items is open. According to Article 2 of the Draft, the controlled items include dual-use items, military products, nuclear as well as other goods, technology and services related to the fulfillment of international obligations and maintenance of national security. Except the chemicals, nuclear, military products, biological products, which have been covered by the Current Regulations, it also include “other goods, technology and services related to international obligations and national security”. Therefore, if a good, technology or service is deemed to be related to national security, no matter in which field, it may be included in the scope of export control.
Second, the scope of the controlled items is extended to service. In Current Regulations, related service is only involved in the Regulations on Export Control of Military Items, the controlled items in other regulations are equipment, materials, supplies, technologies, etc.. The draft explicitly stipulates that the scope of controlled dual-use items, military products and nuclear includes related services.
2.The regulated acts extended
According to Article 2 of the Draft, regulated acts include the transfer of controlled items from China to foreign countries, and provision by Chinese citizens, legal persons and other organizations to foreign natural persons, legal persons and other organizations. The regulated acts in the Current Regulations are trade exports and foreign exchanges, gifts, exhibitions, assistance, services, and other technology transfers. The regulated acts in the Draft are extended to cross-border transfer in geography and cross-border transfer in nationality. Even if the controlled items are transferred within China, they should be controlled as long as the recipient is a foreign natural person, legal person or other organization. The transfer of controlled items to foreign-invested enterprises is not mentioned in the Draft. In theory, foreign-invested enterprises established under Chinese laws are Chinese legal persons and should not be subject to export control. However, considering the special circumstances of foreign companies, especially when the actual controllers are foreign companies and the management may also be foreigners, whether and how to impose restrictions on transfer to foreign-invested enterprises may depend on the future enforcement standards.
Article 45 of the Draft stipulates that the transit, transshipment, through goods and re-export of controlled items, or export from customs special supervision zones (such as bonded areas, export processing zones) and bonded supervision areas (such as export-controlled warehouses, bonded logistics centers, etc.) shall also be governed by this law. The Current Regulations have imposed restrictions on transit, transshipment, through goods of nuclear items and nuclear dual-use items, the Draft extends the scope of application to all the controlled items. Re-export is a newly added content, which means that the export from the importer of the controlled items to third party will still be subject to the export control of Chinese authorities.
3.The control lists adjusted
The current export control is based on control lists, including five lists of biological dual-use supplies, missiles, nuclear dual-use supplies, military products and nuclear export. The export of monitored chemicals is not controlled with a list. The Draft stipulates that the lists of controlled items shall be uniformly implemented, including the dual-use item export control list, the military export control list and the nuclear export control list.
The Draft provides for temporary control measures on items outside the control lists. According to the Current Regulations, temporary control measures have been applied to goods outside the list for biological dual-use products, missiles and nuclear dual-use items. The draft expands the scope of temporary control measures that can be applied to all the controlled items, while limiting the period of implementation to no more than two years.
4.The regulatory measures more diversified
In the Current Regulations, the regulatory measures are relatively simple. For export operators, they need to be registered or obtain authorization, qualification of franchise. For each export projects, it shall be approved. The Draft provided various regulatory measures to cope with different regulatory requirements. The regulatory measures in the Draft include:
(1) For export operators, they are regulated through franchise, registration, etc .;
(2) For the export projects, the permission system applies; the controlled items may be prohibited from export or export to specific natural persons, legal persons, and other organizations;
(3) The Draft also requires monitoring of the end use of controlled items after export. The main requirements include: submitting certificates of end user and end use, end user commitment not to change the end use or transfer to a third party without permission, and export operators’ obligation to report change of end users or end use, establishing blacklists, etc.
At the same time, the Draft also provides simple control measures. If an export operator's internal compliance review system is operating well and there is no record of major violations, the export control administration department may grant facilitation measures to the export operator, which can replace the permission.
5.Compliance requirement on export operators higher
According to Article 15 of the Draft, in addition to the control lists, when export operators know or should be aware of or are notified that the following risks may happen, they need to apply to competent departments for permission:
(1)It will endanger national security;
(2)The items will be used to design, develop, produce or use weapons of mass destruction and their carriers;
(3)The items will be used for nuclear, biological and chemical terrorist purposes.
Compared with the Current Regulations, the compliance requirement on export operators is higher. First, the scope of the risks to be examined is wider. Second, once there is a possibility of such risk, the export operators shall apply for permission. In addition, the scope of the “export operators” in this article is not defined. They may only include the export operators which have been registered or obtained the qualification of franchise in accordance Article 12 of the Draft, or also include the ordinary export operators. If the ordinary export operators are included, all the export operators shall check their compliance with respect to export control.
6.The investigation power of competent departments increased
In the Current Regulations, only the Regulations on the Control of the Export of Dual-Use Nuclear and Related Technologies stipulates that the Ministry of Commerce can implement investigative measures, but the detailed investigative measures are not specified. The Draft gives the competent departments on export control strong investigative power. The competent departments have the power to take a variety of investigative measures, mainly including entering into business premises, inquiring relevant personnel, checking and copying transaction documents and financial documents, inspecting transportation vehicles, sealing up or seizing items, checking bank accounts, etc.. For sealing up, seizing items and checking bank accounts, the permission by the person in charge of the competent departments in writing is necessary.
7.Penalties for violation increased
The Draft stipulates that legal liabilities for violation of export controls includes administrative liabilities and criminal liabilities. Administrative liabilities include warnings, ordering to stop illegal acts, confiscating illegal gains, fines, etc.. Compared with the Current Regulations, penalties are significantly increased. For example, the amount of fines has been significantly increased. According to Article 44 of the Draft, if constituting crime, criminal liabilities shall be investigated in accordance with the laws. The Current Regulations enumerate the crimes of smuggling, illegal business operations, crimes of disclosing state secrets, forgery, alteration, buying and selling of state documents, certificates, and seals,etc., which are in connection with export control. Although these charges are not re-enumerated in the Draft, we are of the opinion that, since the relevant provisions in the Criminal Law have not changed, these charges will still apply.
8.The assistance of ordinary enterprises included in the scope of punishment
Even if they are not the operators of dual-use items, military products, nuclear products and other controlled items, ordinary enterprises who provide assistance to the violation acts should also bear legal responsibility. Article 37 of the Draft stipulates that the competent departments on export control or the customs has the right to punish those who are aware of the violation but still provide services such as agency, freight, delivery, customs declaration, third-party e-commerce trading platforms and financial services for export control violations.
9.Suggestions relating to the new developments on export control
Due to above new developments on the export control, we suggest that the companies shall take the following measures to cope with the new changes on export control:
(1)Export operators shall timely follow the control lists published by the authorities and check whether their exported items are included in the control lists. When the exported items are not included in the control lists but may be in connection with the dual-use items, military products, nuclear as well as other goods, technology and services related to international obligations and national security, the export operators need to consult the competent departments for confirmation.
(2)Companies are suggested to strengthen compliance management. The scope of compliance management shall cover their trade items, the end usage of their trade items and the business of their partners.
(3)For ordinary enterprises that do not operate controlled items, they should also pay attention to the export control law. When serving customers, it's best to review the customer's scope of business. If the customer's business involves controlled items, it is necessary to check whether the customer has obtained operating qualifications and to check whether each batch of export items has been approved.