The Export Control Law of the People’s Republic of China (“ECL”) took effect from the 1 December 2020. The new legislation unifies export controls provisions scattered across several laws and regulations.
Export Control Law
The ECL establishes the regulatory framework for export control and defines the controlled items subject to export control. For foreign companies, specifically engaged in import and export trade or related business, the ECL may require changes to export licenses, administration, and procedures. With both criminal and administrative liabilities, foreign companies in and outside of China should be prepared for ECL. In this article, we highlight the top takeaways for foreign companies in and outside of China, as well as practical aspects to note.
What is the Scope of ECL?
The ECL defines controlled items subject to export control as follows:
- Dual-use items which can be for civil and military purposes or helping to improve military potentials, especially goods, technologies, and services in design, development, production, or application utilised for weapons of mass destruction;
- Military products comprising of equipment, special production facilities and other related goods, technologies, and services utilised for military purposes;
- Nuclear materials, including nuclear equipment, non-nuclear materials used for nuclear reactors, and related technologies and services;
- Technical materials and data related to the items listed above.
Controlled items could affect companies in international supply-chain or cross-border research and development. For example, foreign items containing components assembled or manufactured in China could be deemed as controlled items. For companies engaged in cross-border research or technology transfer, activities such as research, inter-company research (where the research and development centre are in China), or technology sales to foreign enterprises could be classified as related technical material and data – thus subject to export control.
Furthermore, the ECL includes items temporarily controlled (two years maximum duration) and any related goods, technologies or services outside the controlled items list, which poses a threat to any of the following risks:
- Endangerment to national security;
- Used to design, develop, produce or use any weapon of mass destruction or its delivery vehicle; or
- Used for terrorist purposes.
With a wide scope of controlled items, we recommend companies regularly assess their export risk and business operations by establishing an export compliance system. Equally, the company policy and implementation could be adjusted to ensure employees are trained and equipped to implement the system efficiently, and violations are avoided.
Who is Subject to Export Controls?
Export controls apply to any citizen, incorporated or non-incorporated organisation of the People’s Republic of China (“PRC”) to any foreign organisation or individual. In other words, any export of the controlled items from an individual or organisation in the PRC to an overseas individual or organisation is obliged to obtain the relevant license first from the State Export Control Authorities also known with its acronym as “SECA”.
The scope of ECL also extends to indirect exports, such as transportation, importers, and end-users, and export from bonded areas, export processing zones, other areas subject to special customs supervision. As a result, companies should note the following two aspects:
- Service providers such as import-export agency, freight, delivery, customs declaration, third-party e-commerce transaction platforms and finance services, and so forth are forbidden to provide services to exporters who violate the ECL. In practice, companies should ensure that licenses are applied on-time to migrate logistical problems.
- The ECL extends to both importers and end-users. The SECA shall forbid exports to importers or end-users within control lists. Exporters are required to certify end-users and the end-use of the controlled items. Specifically, end-users shall not alter the end-use of the controlled items, nor assign them to any third parties without the approval of State Export Control Administrative Departments.
What is the Implications of ECL in Daily Operations?
Although the implementing measures have yet to be issued, the Announcement on the Issuance of Import Approval List, Export Control List and Related Administrative Measures for Commercial Encryption (“Circular”) jointly released by the Ministry of Commerce (MOFCOM), the State Cryptography Administration and the General Administration of Customs (China Customs) on 2 December 2020 and effective from 1 January 2021, provides an initial insight to administrative measures of export control. Specifically, the Circular defines products and technologies related to commercial encryption as the first list of controlled items and outline the procedures for the application of import and export licensing approvals.
In practice, the foreign companies should internally review exported items and draft up implementation plans should any items is listed as controlled items. For example, we recommend companies at risk to ensure the following aspects are evaluated:
- Import-export licensing approval applications within time– where applicable;
- Regularly classify export goods to ensure controlled items are clearly defined
- Regularly classify importers and end-users to ensure those within the controlled list are clearly defined
- Notifying trading partners and amend contract clauses
- Keep abreast of further implementing measures and lists and adhere to administrative procedures and supporting documents.
What are the Penalties?
Violation of ECL can result in criminal or administrative penalties. For foreign companies in violation and established outside of China, extraterritorial enforcement jurisdiction of the law can be applied.
Administrative penalties range from general penalties to prohibited activities
- General penalties include warning, ordering to cease the illegal act, confiscating illegal gains, imposing a fine, ordering to suspend the business for rectification and even revoking the qualification of engaging in the export of relevant controlled items, to prohibited
- Prohibited activities include refused application for an export permit for five years, prohibit the person directly in charge or liability from engaging in the relevant export business activities for five years or life.
Additionally, violations of ECL can result in criminal penalties such as exporting controlled items or without permission.
Moving forward into 2021, the controlled lists and implementing measures should be promulgated and effective. As a result, companies should be assessing risks and drawing a contingency plan in preparation for 2021. Where there is inter-company research with the parent company or affiliate from abroad, a wider risk assessment should be conducted, and internal policies updated.
If you have questions or concerns related to the New Export Control Law, please contact Horizons at email@example.com to schedule a consultation session. Horizons can provide insight, expertise and the right solutions for you