I．Introduction
On May 31st, 2019, the Ministry of Commerce People’s Republic of China (“MOC”) first announced through a press conference that China will set up the Unreliable Entity List (UEL) system with a sanctioning effect. On September 19th, 2020, the Regulations on the Unreliable Entity List (“UEL Regulations”) (MOC Order No. 4 of 2020), approved by the State Council, are promulgated with immediate effect. It took more than 1 year for this new legislation to come into effect. The UEL Regulations consists of 14 provisions and introduces the administration mechanism of UEL. As of the date, no foreign entity or individual has been listed on the UEL.
This article aims to provide an overview of China’s unreliable entity list system, including its regulatory targets, the consequences of being listed on the UEL, how to remove from the UEL and so on. We hope that this article may help multinational enterprises understand this new legislation and potential risks they are confront with.
II．Overview
The UEL Regulations are formulated and established in accordance with China’s Foreign Trade Law, National Security Law, and other relevant laws.
Specifically, we reference the following articles which may constitute the legal basis of the UEL regulations:
1）Article 16 and 26 of the Foreign Trade Law
The State may restrict or prohibit the import or export of goods or technologies/ related international service trade if it is necessary to safeguard national security, public interests, or public moral.
2）Article 19 of the National Security Law
The State shall safeguard national basic economic system and socialist market economic order, improve the systems and mechanisms to prevent and resolve economic security risks and protect the security of key sectors and key areas, key industries, key infrastructure and key construction projects as well as other significant economic benefits related to the lifeline of national economy.
3）Article 59 of the National Security Law
The State shall establish a review and regulation system and mechanism for State security, and carry out State security review against foreign investment, specific items and key technologies and network information technology products and services, construction projects that affect or may affect state security, other magnificent projects and matters relating to state security, in order to effectively prevent and resolve state security risks.
It is worth noting that, in the announcement published in May last year, MOC stated that the Anti-monopoly Law (AML) may constitute a legal basis for the UEL system. However, in the final rule of the UEL Regulations, the AML is not explicitly listed as a stated legal basis. From our understanding, if certain activities of a foreign entity violate both the UEL Regulations and the AML, for example the restrictions or prohibitions imposed by the foreign entity in the transactions with Chinese companies do constitute abuse of its dominant market position, the AML enforcement agency may investigate and enforce punishment against it.
According to the interview of the official of Department of Treaty and Law of MOC, the purpose of the establishment of the UEL system is mainly to protect the legitimate rights and interests of Chinese enterprises, other organizations or individuals, to correct the illegal acts of specific foreign entities, to safeguard national sovereignty, security and development interests, and to maintain fair and free international economic and trade order.
We noted that the legislative purposes are also stated in the Article 1 of the UEL Regulations, with protection of national sovereignty, security and development interests as the primary purpose; and safeguard of fair and free international economic and trade order, and protections of legitimate rights and interests of Chinese enterprises, other organizations and individuals as the secondary purposes.
III．General Rules
According to Article 4 of the UEL Regulations, China has established a “working mechanism” composed of relevant central departments to take charge of implementation of the UEL System, which is similar to the composition of the End-User Review Committee[1] of U.S. Department of Commerce that is in charge of the additions, removals, and changes to the BIS Entity List. The Office of the working mechanism will be established at MOC. From the perspective of the requirements to implement the UEL system, in addition to the Ministry of Commerce, we estimate that the Ministries of Foreign Affairs, National Defense, Public Security, Human Resources and Social Security, and the General Administration of Customs may participate in the working mechanism.
Pursuant to Article 2 of the UEL Regulations, China’s UEL system is established in response to certain actions taken by foreign entities in international trade and other relevant activities. Specifically, if the working mechanism finds or by investigation determines that a foreign entity is conducting the following activities, the working mechanism may list this foreign entity on the UEL:
The two standards listed in the UEL Regulations are related respectively to national interests and the interests of private sectors. Although the above two standards are not linked by any “and/or” conjunction, according to our interpretation, the two standards should be applied in parallel, that is, if the activities of a foreign entity meets either of the two standards, it may be added to the UEL. We believe that this interpretation is not only in line with international common practice, but also is conducive to realizing the legislative goals of the UEL system. The first standard corresponds to the primary goal of safeguarding national sovereignty, security, and development interests; while the second standard corresponds to the secondary goal of maintaining fair and free international economic and trade order and protecting the legitimate rights and interests of private sectors.
According to the press conference on May 31st, 2019, the main regulatory targets are the foreign enterprise that “fail to comply with market rules, deviate from the spirit of the contract, and impose non-commercial blockade or suspension of supply on Chinese companies.” We speculate that the legislative agency is concerned of the situation that certain market activities may harm China’s national security or interests, therefore in the final legislation of the UEL system, such market activities are included in the scope of regulation.
Similarly, regarding the Entity List of the U.S., the reasons why entities are listed are mainly related to two categories. One is that entities conduct illegal activities and violate U.S. rules of export controls and sanctions; the other is that the End-User Review Committee of BIS determines that an entity is involved or poses a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the U.S. Therefore, we believe that UEL Regulations are of great significance and establish a legal basis for China to counter unreasonable restrictions against Chinese entities imposed by other countries.
Pursuant to the Article 7 of the UEL Regulations, the working mechanism will consider the following factors and determine whether to list a foreign entity to the UEL after investigations:
It is important to note that, generally, according to Article 93 of the Legislation Law, “laws, administrative regulations, local regulations, autonomous region regulations, separate regulations and rules shall not be retroactive, except for the regulations formulated specially for the purpose of better protecting the rights and interests of citizens, legal persons, and other organizations.” The UEL Regulations do not specifically regulate that retroactivity may be applied; therefore, it can be inferred that the UEL Regulations are not retroactive. When the working mechanism takes into overall consideration of the above factors according to the results of the investigation, it is likely that only violations of laws committed after the promulgation of the UEL Regulations will be a direct reason in order to list a foreign entity on the UEL.
According to Article 2 of the UEL Regulations, the term “foreign entity” refers to an enterprise, other organization, or individual of a foreign country. Under this definition, a Chinese foreign investment enterprise does not fall under the administrative scope of the UEL Regulations. However, if a foreign entity is listed in the UEL and sanctioning measures related to foreign investment prohibitions are imposed on such entity, the operation of its Chinese subsidiaries, portfolio companies and affiliates may still be affected, this includes a VIE entity which is established in China and controlled by a WFOE through VIE agreements. Also, the definition provides legal ground for the PRC government to designate any individual target worldwide, which means the senior management of a foreign entity may be a potential target of the UEL.
When a foreign entity is listed on the UEL, the working mechanism may, based on actual circumstances, decide to take one or several of the following measures against this foreign entity, and make an announcement of the decision:
The restriction or prohibition on import and export activities is comparable to the function and effect of the US's Entity List and OFCA sanctions, with the differences as follows: 1) no measures to block the assets in China of relevant entities are stated; 2) no prohibition of transaction with Chinese persons are stated. If a foreign entity is listed on the UEL, it will be difficult for the entity to directly obtain Chinese product, technology, or service, or make direct sales on Chinese market or with Chinese entities. Considering the severity of this measure, the UEL Regulations also establish a special licensing procedure which is stated below, allowing a Chinese Entity to continue certain transactions with a UEL entity.
Regarding the investment restriction or prohibition, a UEL entity’s ongoing and potential investment activities will be subject to close regulatory scrutiny. However, regarding to the UEL Regulations, it is unclear if their past investment transactions may also be subject to any retrospective review (like CFIUS mechanism). In other words, the actual impact of the investment restriction/prohibition measures applies on foreign entities listed on the UEL which have investment in China remains unclear, and awaits further elaboration from relevant departments or clarification on a case-by-case basis.
It is notable that the China’s Export Control Law also stipulates a blacklist system and for those foreign entities who are listed on the UEL may also be prohibited from conducting certain transactions concerning controlled items under Export Control Law of PRC.
In addition, from the description of the above measures, we can see that the UEL Regulations have left room for discretion for the working mechanism to determine the specific measures to be taken, which is supported by the lack of definition of “relevant personnel”, the lack of interpretation of when “restriction” or “prohibition” applies, the possibility of applying “other necessary measures.”
The working mechanism takes charge of organizing and implementing the UEL System. According to the UEL Regulations, the working mechanism shall organize and implement the UEL by the following procedures:
1）The Investigation Procedures
a. Initiation of Investigation
The working mechanism shall, in accordance with its duties and functions or upon suggestions and reports from the relevant parties, decide whether to investigate the actions taken by the relevant foreign entity; if it decides to investigate, an announcement shall be made.
b. Investigation Method and Scope
When investigating the actions of a foreign entity, the working mechanism may inquire the relevant parties, review or copy the relevant documents and materials, and take other necessary means. The foreign entity may state or defend its case during the investigation. Therefore, we can conclude that, the investigation is openly conducted and the entity subject to the investigation will be notified.
Regarding the scope of investigation, although it can be inferred that the UEL Regulations do not have a retroactive effect, and although not specified, it is possible that past documents and materials of relevant parties may be included in the investigation scope to determine whether an entity ever engaged in certain customed behavior, etc.
c. Suspension and Termination of the Investigation
The working mechanism may decide to suspend or terminate the investigation, basing on actual circumstances such as the relevant foreign entity has rectified its violation behaviors and resumed normal transactions. If the facts on which the decision to suspend the investigation is based have substantially changed, the investigation may be resumed.
d. Direct Designation without Investigation
According to the UEL Regulations, there are two pathways the working mechanism determines to list a foreign entity on the UEL: by investigation or directly designated such entity where the facts are clear.
Where the facts about the actions taken by the relevant foreign entity are clear, the working mechanism may, by taking into overall consideration the factors specified above, directly determine whether to add the relevant foreign entity to the UEL. Therefore, under certain circumstances where facts are clear, no open investigation process stated above will be held prior to the designation.
2）The Decision Procedures
When the working mechanism determines to add a foreign entity in the UEL, an announcement shall be made. The designation announcement shall also include the measures to be taken against such entity. According to the UEL Regulations, it is possible that the working mechanism will not impose any sanctioning measures on a listed entity.
Also, the risks of conducting transactions with the said foreign entity may be alerted in the announcement. This confirms that not all transactions with entities listed in the UEL are prohibited, where the main risks come from import and export transactions for Chinese companies.
3）Possibility of Rectification
When the time limit for a listed foreign entity to rectify its actions is specified, there is a possibility of rectification.
Before the specified rectification period elapses, the decided measures shall not be implemented. Where the relevant foreign entity fails to make rectifications within the specified time period, the decided measures shall be implemented.
4）Import/Export Exception Application
The working mechanism is authorized by the UEL Regulations to grant approvals to the Chinese entities[2] that intending to engage in restricted or prohibited import/export activities on a transaction-by-transaction based review.
Where, under special circumstances, it is necessary indeed for a Chinese enterprise, other organization, or individual to conduct transactions with a listed foreign entity that is restricted or prohibited from engaging in China-related import or export activities under the UEL Regulations, an application shall be submitted to the Office of the working mechanism, and the transactions with the foreign entity in question may be conducted upon approval.
5）Possibility of Removal
The working mechanism may, basing on actual circumstances, decide to remove the foreign entity from the Unreliable Entity List. The decision of removal shall be announced, and the measures taken according to the UEL Regulations shall be ceased as of the date of the announcement.
The UEL Regulations states the following methods for removal:
IV．Implications
Since the announcement of the UEL system from last year, and the promulgation of the UEL Regulations, there are many doubts on the Chinese Government’s intentions on direct investment and international trade.
During the press conference regarding the UEL Regulations held on Sept. 20th, 2020, head of Department of Treaty and Law of MOC further emphasized the following unchanged positions of the Chinese Government:
Based on the above, we can conclude that the UEL Regulations is a defensive legislation and will be implemented with prudence and deliberateness.
During the press conference regarding the UEL Regulations, MOC made a denying statement when asked whether the UEL Regulations are China’s counter-reaction towards U.S. measures against Huawei, Wechat, TikTok, and other Chinese enterprises. MOC stated that the establishment of the UEL system and the promulgation of the UEL Regulations is an established work arrangement, which was first announced in May last year. MOC further confirmed that the UEL Regulations are not targeting any specific country or particular entity.
However, it is worth noting that MOC’s first announcement in May, 2019 came shortly after the U.S. added Huawei and its 68 non-US subsidiaries to the Entity List; and the promulgation came a day after the U.S. DOC’s identifications of prohibited transactions related to Wechat, which came out according to the 45-day period timeframe set by the relevant Executive Order.
Regarding the U.S companies that are providing services to or otherwise dealing transactions with Wechat or Tiktok, it is possible that such companies will be held liable under the UEL Regulations for following U.S. DOC regulations of president executive orders. Though not clearly defined or addressed in the UEL Regulations, theoretically, the UEL Regulations may to some extent, function as a blocking statute to confront the extraterritorial effect of laws and regulations of a foreign jurisdiction.
MOC confirmed in the press conference on September 20th, 2020, that the UEL Regulations are not specific to targeted countries or entities. Which enterprises will be designated depends on i) whether the enterprise itself violates Chinese law, ii) whether it endangers China's national sovereignty, security, and development interests; iii) whether it violates the normal principles of market transactions, and iv) whether it has imposed blockade, suspension of supply, or other discriminatory measures on Chinese entities. Also, MOC stated that there is no timetable nor any preset list of the UEL entities and emphasized that the UEL will be “strictly limited to only few foreign entities that break market norms and violate the applicable laws and regulations”.
According to a news coverage by CNBC, a Eurasia report states that actions from the Chinese side would likely focus on products with a domestic competitor and avoid disrupting imports of products that China’s technology industry needs. Another factor could be companies involved with U.S. arms sales to Taiwan. The consulting firm also listed a few U.S. companies that are plausible targets of the UEL, including Cisco, Dell/EMC, HP, Lockheed Martin, Rockwell Collins. The report further touched companies such as Apple, Microsoft, Qualcomm, Intel, AMD, Boeing, etc.
On another note, when the establishment of the UEL system was first announced in May last year, according to a news coverage from Global Times, a source close to the Chinese government stated that U.S. companies such as Apple, Cisco, Qualcomm, and Boeing may become subject to relevant investigations. The source also pointed out these investigations may be launched according to the Cybersecurity Review Measures and the Anti-monopoly Law, which although not specifically stated, could still be among the legal basis of the implementation of the UEL system according to the UEL Regulations.
V．Suggestions
All foreign entities that engage in business with China, especially for those whose key clients or distributors are in China, shall implement internal precaution measures regarding the UEL system. Also, such foreign entities should conduct a self-evaluation of its past business operation customs and procedures in order to determine the possibility of violating the UEL Regulations and other laws of China, which may lead to being listed in the UEL. Upon determination that a risk exists or may arise, mitigating and correction measures shall be taken accordingly.
Regarding to general Chinese entities with knowledge that damage caused by a foreign entity arises from a violation of the UEL Regulations or other laws, they are strongly recommended to report the clear facts of such violation to the working mechanism or to suggest the initiation of an open investigation. All Chinese entities should also maintain and update a monitoring system of the UEL and relevant announcements from the working mechanism, in order to timely adjust, suspend, or cease business activities with listed foreign entities in order to avoid risks of administrative penalties. Moreover, Chinese entities should make sure that their foreign business partners follow the rules of the UEL Regulations and other laws of China, in order to secure the stability of their business relationship. If a foreign business partner is in the procedure of UEL investigation, relevant Chinese entities should cooperate with the regulating authority’s investigation.
Regarding to Chinese entities that engage in import/export business with foreign entities, when such Chinese entities hope to maintain prohibited or restricted import/export activities with a listed foreign entity, the Chinese entity must apply for the working mechanism’s import/export license before the transaction.
[1] The End-User Review Committee is composed of representatives of the Departments of Commerce, State, Defense, Energy and, where appropriate, the Treasury.
[2] A Chinese entity is defined as an enterprise, other organization, or individual of China.
刘红梅
大成北京总部 律师
邮箱：hongmei.liu@dentons.cn
龙 洋
大成北京总部 律师
邮箱：yang.long@dentons.cn
陈怡菁
大成北京总部 律师
邮箱：yijing.chen@dentons.cn
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