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Home > Export Control
Reading Into China’s Export Control Law
By Henry Chen | 2020/10/21 18:56:00

Against the backdrop of the trade war between China and the US, the 22nd Session of the Standing Committee of the 13th National People's Congress passed the Export Control Law on October 17, 2020, which will take effect on December 1 this year.  This law fills in the blank of systematic and overall legal norms in the field of export control in China and lays a necessary legal foundation for the development of export control mechanism.

 

The newly passed Export Control Law totaling 49 articles consists of five chapters including general provisions, export control policy, control list and control measures, supervision and regulation, legal responsibilities and supplementary provisions.  Below are some highlights of the new law.

 

Reciprocal measures

 

The most eye-catching provision is Article 48 on reciprocal measures. This provision specifies that “if any country or region abuses export control measures to cause  harm to China's national security and interests, China may take corresponding measures against that country or region in light of the actual situation".  This provision is free of any ambiguity and provides a legal basis for the PRC government to take counter measures against the US government for any unreasonable export blockade, in terms of which we have to mention China Initiative.

 

Since the US Department of Justice announced its "China Initiative" on November 1, 2018, it has filed scores of criminal cases pertaining to economic espionage, trade secrets and export controls. 

 

Specifically, for export control mechanism, the concerned law applies to a broad range of technological products, including physical shipments, cross-border electronic transmissions—such as by email or downloading from a remote computer server—and disclosure of controlled technology to a non-US citizen or permanent resident even if such transfers occur entirely outside of the United States.  For those products that are implicated by the controls, a labyrinth of regulations exist that must be expertly navigated to avoid sanctions, including the Arms Export Control Act; the International Traffic in Arms Regulations (ITAR) administered by the Department of State’s Directorate of Defense Trade Controls; the Export Administration Regulations (EAR) administered by the Department of Commerce’s Bureau of Industry and Security; and the trade and economic sanctions programs and regulations administered by the Department of the Treasury’s Office of Foreign Assets Control.  Certain restrictions are also country specific due to national security, foreign policy, nonproliferation or other concerns.  Violations of US export control laws and regulations can result in variable civil penalties, including up to US$500,000 per violation under the ITAR and up to US$250,000 per violation under the EAR.  Some also carry criminal penalties.  For example, it is unlawful for a person to violate, attempt to violate, conspire or cause a violation under the International Emergency Economic Powers Act, and willful violations are criminally punishable by up to twenty years of imprisonment under 50 U.S.C. § 1705(a), (c).

 

As the China Initiative goes on, the measures adopted by the US government are becoming more and more aggressive for many unexpected diversified legal grounds such as visa fraud.  If it is too much to say China Initiative is “abusing”, it seems rather reasonable to say it becomes “more than political”.  No wonder China claims to adopt reciprocal measures (a euphemistic saying of retaliation) in the new law, which is a mirror image of the measures that US government has been using.  

 

Extraterritorial jurisdiction

 

“Long-arm jurisdiction” in the US law enforcement becomes notorious in China.  It seems that everyone in China knows that the US government takes “shameless” liberty in imposing huge fines on Chinese companies and putting Chinese people into prison.  As such, Uncle Sam is viewed as Policeman on Pacific Ocean where no policeman is needed.

 

In relation to the “long-arm jurisdiction”, the new law provides for extraterritorial jurisdiction over any possible violations outside China.  As such, Article 44 stipulates that "organizations and individuals outside the territory" will also be held accountable in accordance with this law if they violate the provisions of this law or adversely affect "national security and interests" of China.  This should be of a particular concern to multinational or non-Chinese entities, especially those helping the US government establish export blockade against China on Chinese entities and/or individuals. 

 

“Controlled items” and “export”

 

The term “controlled items” is similar to that defined by the US.  It includes physical goods, technology (including information such as technical data), services, etc., covering dual-use items, military items and nuclear items. Control measures include formulation of control lists (control lists, directories or catalogues), implementation of export licenses and so on.

 

The “export” definition is similarly as broad as what is defined under the US Export Administration Regulations.  It includes "transfer from China to another country", "supply to foreign organizations and individuals" and "transit, transshipment, through transport, re-export or export from bonded areas, export processing zones and other areas under special customs supervision, and export supervised warehouses, bonded logistics centers and other places under bonded supervision to overseas".

 

Export control licensing system

 

Not dissimilar to the US, China adopts an export control licensing system.  Therefore, certain controlled items are not allowed to be transacted  except with an appropriate approval.  Specifically, dual-use items are subject to the approval of the Ministry of Commerce (Industry Security and Import and Export Administration); military items are subject to the approval of the State Administration of Science, Technology and Industry for National Defense; and nuclear items are subject to the approval of the State Atomic Energy Authority.  Major transaction projects shall be approved by the State Council and/or the Central Military Commission.

 

Principle of penetration

 

Again similarly, the new law adopts the “principle of penetration” with the law applicable all the way to end users and end uses.  Exporters are required to submit end-user certification documents issued by the official authorities of the destination country or the country where the customer is located.  If there is any inconsistency, an immediate report is required.  Accordingly, transactions should be stopped, and the items should be retrieved.  

 

In addition, the entities in the whole supply chain are all required to be in compliance with the new law, including upstream  suppliers and downstream agents and distributors.  If they know or should have known that there is any violation, they are obliged to blow the whistle.  Otherwise, they will be deemed as a violator under the new law and even added to the blacklist.

 

As said, the new law makes it clear that China will also adopt a blacklist system.  Similar to the restrictions by the US export control agencies, entities or individuals that violate the new law will be blacklisted and,  in case of any violation, may be fined up to RMB 5 million (approximately USD735,000), and the relevant export business qualification of the controlled items may be revoked.  Those who commit any criminal acts may even be held criminally liable.

 

Meaningful credits for compliance

 

The new law grants meaningful credits or bonuses to those that have established a robust compliance management system (CMS).  Article 5 of the new law provides: "The state administration of export control issues guidelines on export control in relevant industries in due course and guides exporters to establish and improve internal compliance systems for export control and standardize their operations." Article 14 stipulates: "If an exporter establishes a well-run  internal compliance system for export control, the state administrative department for export control may grant it a general license and other convenient measures for the export of the controlled items."

 

Comparatively, the credits or bonuses are meaningful, but not as much as that under the US law pursuant to which violators may even be exonerated from administrative or criminal liabilities.  It remains to be seen if the implementation rules will be more generous in granting credits or bonuses.  However, from the legal history of China, our legislators may not be that generous.

 

Lack of clear exonerating language should not be a disappointment at all.  In practice, a robust CMS can function as golden shield to bounce off even serious criminal liabilities.   A well designed and implemented CMS is an absolutely prima facie evidence that the concerned entity and its executives lack mens rea – a unique legal terminology for criminal intent both under the US law and the common legal theory under the Chinese Criminal Law as well.

 

In terms of the establishment of a robust CMS, ISO 19600:2014 Compliance management systems—Guidelines, to which the US, UK, France, China, Australia, Germany and other countries are signatories, are an effective tool.  The author of this article, Henry Chen, participated in the drafting of the standard.


In short, China’s Export Control Law provides many unexpected, but similar compliance obligations for the entities or individuals in and outside China.  MNCs and non-Chinese companies must pay great attention to the new law to avoid violations and obtain compliance privileges.   If you need any help, please do not hesitate to contact henry.chen@dentons.cn.

 

_________

The author, Henry Chen, licensed to practice law in China and New York, is a senior partner at the Dentons office in Shanghai. Before joining Dentons, Henry was AP Compliance Director of Ford. Henry's practice areas include FCPA, anti-bribery and fraud investigations, cyber security and data governance, economic sanctions and trade controls, compliance management systems, corporate matters and dispute resolution. You can reach Henry by sending an email to henry.chen@dentons.cn. Henry is the author of the book Risk Management on Commercial Bribery in China and the book Compliance Risks of Enterprises in Globalization: Outbreak and Control.



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