The initial draft of the ECL was issued by the Ministry of Commerce of China for public comment in June 2017, followed by the release of a revised draft for public comment by the National People’s Congress in December 2019. At the end of June 2020, a further revised draft was submitted to the SCNPC for a second review. Four months later, and after deliberating a third revised draft, the SCNPC finally passed the ECL into law.
The passage into law of the ECL marks a significant step by the Chinese government towards the establishment of a comprehensive and consolidated export control regime, by providing the underlying legal basis for existing and future secondary regulations and other implementation rules in this area.
Some commentators have said that in the context of the ongoing US-China trade war, and the escalation of tensions between the two countries following President Trump’s imposition of a series of sanctions on Chinese companies including Huawei, ByteDance (TikTok), Tencent (WeChat) and Semiconductor Manufacturing International Corporation (SMIC), the enactment of the ECL will allow the Chinese government to take reciprocal measures against the United States, or any other country or region that abuses its own export control regime and threatens China’s national security and interests.
The ECL contains 49 articles separated into five chapters. The key matters addressed by the law are summarised as follows.
Article 2 of the ECL sets forth four categories of “controlled items”:
(a) dual-use items that can be used for both civil and military purposes;
(b) military items;
(c) nuclear items; and
(d) other goods, technologies, services and items that are vital to the protection of China’s national security and interests as well as the performance of China’s commitment to nuclear non-proliferation.
Controlled items also include technical data for any of the above.
The competent government authorities will issue lists of controlled items for the purpose of implementing the ECL.
In addition to the lists of controlled items, article 9 provides a catch-all provision pursuant to which any unlisted goods, technologies or services may nevertheless be temporarily controlled for a period of up to two years. When this period has elapsed, the temporary restrictions may be removed, extended or changed to permanent ones, depending on the results of an assessment conducted by the relevant government authorities.
Under article 2, the trade activities captured under the ECL include:
(a) the transfer of controlled items outside China; and
(b) “deemed export” – the provision of controlled items by Chinese citizens, legal persons or organisations to foreign institutions or individuals.
In addition, the transit, transhipment, and re-export of controlled items, as well as the export of controlled items from special customs supervision zones (e.g., bonded areas or export processing zones) and bonded supervision places (e.g., export supervision warehouses or bonded logistic centres), are also subject to the ECL.
Exporters wishing to export controlled items that are on a controlled items list or otherwise subject to temporary restrictions, must apply to the competent authorities for export permits for the purpose of carrying out the controlled activities as stated above.
Further, exporters must also apply for an export permit where they are aware, or should have been aware, that the goods, technologies or services they wish to export might be used (i) to threaten the national security and interests of China, (ii) for the design, development, manufacturing or use of weapons of mass destruction or their delivery systems, or (iii) for terrorism purposes, irrespective of whether such goods, technologies or services are on the controlled items list or subject to temporary restrictions.
Under article 13, when assessing applications for export permits, the competent authorities may take the following factors into consideration: (i) national security and interests, (ii) international obligations and commitments, (iii) the nature of the export, (iv) whether the items being exported are sensitive, (v) the destination countries or regions, (vi) the end user and end use, (vii) the credit record of the exporter, and (viii) other factors prescribed by law or regulation.
End-user and end-use certificates
Article 15 makes it mandatory for exporters to submit end-user and end-use certificates for the controlled items. Such certificates must be issued by the end-user or the government of the countries or regions where the end-user is located.
Under article 16, end-users must undertake not to alter the end use of the controlled items or transfer such items to any third party, unless approved by the competent authorities. Exporters or importers who become aware of any change to the end user or end use must immediately report such change to the competent authorities.
The competent authorities may maintain a list of importers and end users who have violated the ECL, and may prohibit such persons from trading in controlled items, or restrict their ability to do so.
Implications for business
It should be noted, in particular, that article 44 of the ECL provides that any institution or individual outside of China that violates the relevant export control requirements of the ECL, threatens the country’s national security and interests, or hinders the performance of nuclear non-proliferation and other international obligations, shall be held liable for such violation. In other words, the new legislation has an extraterritorial character that will widely impact on any company or individual engaged in the business of exporting items, whether they are located within China or outside.
Exporters are encouraged to develop internal systems to ensure compliance with the export control regime. Article 14 provides that the competent authorities may grant simplified procedures to those who have developed internal compliance systems (such as general permits) that are shown to be effective in ensuring the export of controlled items is in compliance with the law.
As stipulated in chapter 4 of the ECL, any violation of the law may be sanctioned with a range of administrative or criminal penalties. Exporters engaged in the illegal export of controlled items face forfeiture of any income illegally gained, as well as a fine up to 10 times the amount of such illegal income if that amount exceeds RMB 500,000, or if not, a maximum fine of RMB 5 million. The authorities may impose other forms of sanction including but not limited to the suspension or revocation of export permits.
It is important to note that article 20 of the ECL also prohibits any organisation or individual from providing agency, freight, delivery, customs declaration, third-party e-commerce transaction platform, financial and other services to exporters engaged in illegal export activities. With that in mind, banks, e-commerce platforms and other service providers (such as shipping companies, freight forwarders and customs agents) are advised to carefully review and update their current sanction and export control policies to ensure compliance with the ECL.
The introduction of the ECL marks another step by China towards a comprehensive and consolidated export control regime, and provides the Chinese government with certain leeway and discretion in the implementation of the ECL. It is expected that the Chinese government will issue implementing regulations, rules and guidelines to provide more details and guidance on compliance with the ECL. Businesses directly or indirectly involved in international trade are well advised to keep abreast of further developments with regard to the ECL and implement appropriate policies and procedures to ensure their operations are compliant with China’s export control regime.
Client Alert 2020-573