China: Examining the Implications for Global Companies of New Export Control Law and ‘Unreliable Entities List’

International trade gained a new layer of complexity with the adoption and updating by the People’s Republic of China of two trade regimes, the Unreliable Entities List (UEL) and the Export Control Law (ECL). These actions add to short-term uncertainties in the US-China relationship. With the arrival of a new US presidential administration, companies involved in or affected by trade between the United States and China will need to prepare for potentially significant shifts in the US-China relationship, and cope with uncertainties as the new US presidential administration reveals its priorities.

While the UEL has already taken effect with the Ministry of Commerce of China (MOFCOM) taking the lead on implementing that regulation, China has yet to name any entities to this list, which applies restrictions to “Foreign Entities” determined to have acted in a manner that “endangers” China’s national “sovereignty, security and development interest.” China has not made clear how it will determine when an entity should be placed on the UEL. Nonetheless, entities that do business or hope to do business in China must take seriously the prospect of being included on the UEL. Companies named to the UEL could be subject to severe restrictions, including a prohibition on engaging in China-related import or export activities.

The implementation of the UEL, and the potential reinvigoration of China’s export control regulations, means that multinational companies will need to manage the regulatory requirements posed by China’s regime while also taking into account the requirements of other jurisdictions, most notably US and EU obligations. Potentially competing requirements could require companies to choose between compliance with one regime over another. While China’s developments may ultimately bring a greater level of certainty to its export control regime, companies engaged in cross-border trade will need to develop strategies for working within the confines of the conflicting requirements.

As of December 1, 2020, the ECL also went into effect, establishing China’s first comprehensive framework for restricting exports of military and dual-use (items having both civilian and military applications) products and technology for national security and public policy reasons. It resembles the export control regime in the United States and certain enforcement provisions correlate with the UEL. The ECL’s purpose varies from its UEL counterpart, however. For instance, the UEL focuses more on terminating or suspending transactions of foreign entities with their Chinese trading partners, while the ECL’s “Controlled Entities” list concentrates more on Chinese companies and on compliance by subsidiaries and end-users. Violations of the ECL can be subject to severe penalties, including large fines, the suspension of business licenses, or the revocation of export qualifications.

Organizations with global operations should also take into account some of the lesser-known implications of the UEL rules:

• The UEL affords a “Foreign Entity” the opportunity to explain why it should not be included before it is placed on the list, thus providing a measure of due process. Even if included, the Foreign Entity may be eligible for a grace period in which to rectify its standing before the imposition of restrictions or penalties. For entities named to the list, exemptions and removal or de-listing may be available following a showing consistent with the enumerated requirements.
• Targeted entities under the UEL can include foreign individuals, not just corporations; thus those in management must be cognizant of the potential personal liability that can accompany a violation of the requirements enumerated in the UEL regulations.
• Given the current uncertainties surrounding UEL, the more homogenous provisions in companies’ commercial documentation may lose some of their effectiveness. This creates a need for greater specificity in corporate documentation to address the implications of each jurisdiction and the potentially conflicting scenarios. Companies can take immediate steps to prepare for the inevitable decisions that will be required by updating processes, including proactively reviewing supply chains. Contingency planning may include, for example, having supply chain redundancies, and identifying activities that may raise the risk of inclusion on the UEL.

Likewise, China’s ECL contains less obvious provisions that companies should consider, including:

• The ECL regulates not only exporters and related third-party service providers, but also end-users and importers. In addition, it includes provisions authorizing extraterritorial impact, allowing the State Export Control Administrative Departments (SECADs)—the lead government arm implementing the ECL—to enforce it against entities and individuals outside of China.
• Similar to the UEL, however, companies can request removal from the list of Controlled Entities.
• Lesser-known “items” on the Control List include data, such as technical documentation associated with the actual items on the list, specifically technologies safeguarding national security. Chinese authorities likely will adopt a broader enforcement regime, including civil and criminal liabilities, especially regarding improper exports of technical data for the controlled items.
• While SECADs puts together a new Controlled Items List, items not on any current list can still be included on a roster of “Temporarily Controlled Items.” This designation, lasting up to two years, imposes the same measures as those applying to items on the Control List. After two years, another review will occur. Exporters should be prepared to conduct their own assessments of their product and data classifications to mitigate risks.
• Even early in a product lifecycle, both registered and unregistered intellectual property are included under export controls, including those within the same company. Actions subject to control include sending a patent application for preparation in a foreign country, including technology originating outside China; sharing technologies with a foreign person as part of the preparation of a foreign patent application or conducting patent searches; and releasing, exchanging, or transferring technologies or source code to a foreign person, in the United States or abroad.

Companies potentially subject to these changes in China’s trading regulations need to plan how they will address their new responsibilities. For example, entities may need to identify redundancies and update processes to enable operations to continue without interruption, and to address the new compliance risks associated with these regulations.

Morgan Lewis anticipates the enactment of more a fulsome framework as a legislative priority in the near future. For more in-depth information, please contact Stefani Cornwall for further information, including slides and a recording of a recent webinar on this subject.