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Home > Compliance
China Issued Its List of Unreliable Entities
By Henry Chen | 2020/10/10 23:32:25


On September 19th, 2020, China’s Ministry of Commerce issued the Regulation on the List of Unreliable Entities. This regulation seems to be a response by China to the recent Wechat and Tiktok ban. This regulation shows that the Chinese government, like the US government, is going to increase enforcement in export control and trade sanction areas. American businesses with significant exposure to the Chinese market should update their compliance system and take this new regulation into account. Because this piece of regulation has just come into effect, so far, there have been no entities added to the sanction list. 


With animosities between the US and China in full swing, companies conducting businesses in either country are facing growing uncertainty. The current pattern of actions between both countries can be best described as tit-for-tat. The recent attempt by Trump to ban WeChat and TikTok via the US Commerce Department is the Trump administration’s latest attempt to separate the world’s two largest economies. Prior to the WeChat and TikTok ban, there have already been a series of economic sanctions issued by the United States against many of China’s technology companies such as Huawei and ZTE. 


According to the Q&A by an expert from China’s Ministry of Commerce, the determination process for blacklisting entities are as follows. The body administering this regulation takes a wholistic look at the entities in question. They assess the extent to which it compromises China’s sovereignty, security and development interests. The decision to backlist an entity can be made either after an investigation or be made directly based on relevant considerations. 


This expert further pointed out that the Chinese authorities will accept reports from market participants of foreign entities who block Chinese businesses’access to technologies, cut off essential supplies to them, or discriminate them in the course of market activities. 


If put on the entity list, companies face not just monetary fines, but also potential blocking of investment, blocking of entry of persons, as well as blocks to import and exports. Consequently, one would assume that this piece of regulation targets entities irrespective of whether they have presence in China.


The text of the new regulation is as follows:


                            Regulations on The List of Unreliable Entities


Article 1 These Provisions are formulated in accordance with the Foreign Trade Law of the People's Republic of China, the State Security Law of the People's Republic of China and other relevant laws, with a view to safeguarding state sovereignty, security and development interests, maintaining a fair and free international economic and trade order, and protecting the lawful rights and interests of Chinese enterprises, other organizations or individuals.


Article 2 The State shall establish a list of unreliable entities and take corresponding measures against the following acts of foreign entities in international economic, trade and related activities:

1.       Endangering China's national sovereignty, security and development interests;

2.       Violating normal market trading principles, interrupting normal transactions with Chinese enterprises, other organizations or individuals, or takes discriminatory measures against Chinese enterprises, other organizations or individuals, thus severely damaging the legitimate rights and interests of Chinese enterprises, other organizations or individuals.


Foreign entities referred to in these Provisions include foreign enterprises, other organizations or individuals.


Article 3 The Chinese Government adheres to an independent foreign policy, adheres to such basic norms governing international relations as mutual respect for sovereignty, non-interference in each other's internal affairs, equality and mutual benefit, opposes unilateralism and protectionism, firmly upholds China's core national interests, upholds the multilateral trading system, and promotes the building of an open world economy.


Article 4 The State shall establish a working mechanism involving the relevant departments of the central government (hereinafter referred to as the working mechanism), which shall be responsible for the organization and implementation of the listing system of unreliable entities. The office of working mechanism is located in the commerce department of the State Council.


Article 5 The working mechanism shall, on the basis of its functions and powers or on the basis of suggestions and reports from relevant parties, decide whether to investigate the acts of the relevant foreign entity; the decision to conduct an investigation will be published.


Article 6 When investigating the conduct of the foreign entity concerned, the working mechanism may inquire the party concerned, consult or copy the relevant documents, materials and take other necessary actions. During the investigation period, the foreign entity concerned may make a statement and defend itself.


The working mechanism may decide to suspend or terminate the investigation according to the actual situation; the investigation may be resumed if the facts on which the decision to suspend the investigation is based change significantly.


Article 7 In reaching a decision on whether to add a foreign entity to the list, the working mechanism shall base its decision on the results of the investigation and take into account the following factors, and publish its decisions.

1.       The degree of adverse effect to China's national sovereignty, security and development interests;

2.       The degree of adverse effect to the legitimate rights and interests of Chinese enterprises, other organizations or individuals;

3.       Whether it complies with international trade and economic rules;

4.       other relevant factors.


Article 8 Where the facts of the conduct of the foreign entity concerned are clear, the working mechanism may make a decision on whether to add the foreign entity to the list of unreliable entities by directly taking into account the factors set forth in Article 7; and such a decision shall be published.


Article 9 The announcement listing the relevant foreign entity on the list of unreliable entities may alert the risk of conducting transactions with the foreign entity and may, in light of the actual situation, specify the time limit for the foreign entity to correct its conduct.


Article 10 With respect to foreign entities listed on the list of unreliable entities, the working mechanism may, in light of the actual situation, decide to take one or more of the following measures (hereinafter referred to as measures of disposition) and they shall be published:

1.       restricting or prohibiting its import and export activities related to China;

2.       restricting or prohibiting its investment in China;

3.       restricting or forbidding the entry of relevant persons and means of transport;

4.       restricting or cancelling work permits, stay or residence permits of relevant personnel within the territory of China;

5.       Imposing fine according to the seriousness of the circumstances;

6.       other necessary measures.


The measures prescribed in the preceding paragraph shall be implemented by the departments concerned according to their respective functions and duties, and other units and individuals concerned shall cooperate in the implementation.


Article 11 If the notice listing the relevant foreign entity specifies the time limit for it to correct its course of conduct, measures set forth in Article 10 shall not be applied to the relevant entity within the time limit; Where the relevant foreign entity fails to correct its conduct within the time limit, the relevant foreign entity shall be dealt with in accordance with the provisions of Article 10.


Article 12 Where a foreign entity concerned is restricted or prohibited from engaging in Import and export activities related to China, and Chinese enterprises, other organizations or individuals need to conduct transactions with the foreign entity under special circumstances, they shall apply to the Office of Working Mechanisms and may, upon approval, conduct corresponding transactions with the foreign entity.


Article 13 The working mechanism may, in light of the actual situation, decide to remove the foreign entity concerned from the list of unreliable entities. Where the foreign entity concerned corrects its conduct and takes measures to eliminate the consequences of its conduct within the time limit specified in the announcement, the working mechanism shall make a decision to remove it from the list of unreliable entities.


The foreign entity concerned may apply for its removal from the list of unreliable entities and the working mechanism shall decide whether to remove it based on the actual situation.


The decision to remove the relevant foreign entity from the list of unreliable entities shall be announced; as of the date of the announcement, the disposal measures taken in accordance with Article 10 shall cease to be effective.


Article 14 These Provisions shall take effect as of the date of promulgation.


_________

The author, Henry Chen, licensed to practice law in China and New York, is a senior partner of Dentons Shanghai Office.  Before joining Dentons, Henry was AP Compliance Director of Ford.  Henry's practice areas include FCPA, anti-bribery and fraud investigation, cyber security and data integrity, economic sanction and trade control, compliance management system, corporate matters and dispute resolutions.  Henry's email is 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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