The recent couple of years have been a compliance roller coaster ride for businesses with supply chains involving China. China went on a major legislative revamp and rolled out a series of new laws, including the new Export Control Law (ECL) of the People's Republic of China (PRC), which came into force on 1 December 2020.
In our past client alerts, we wrote about the status of the implementation of the ECL and the principles that form the backbone of the ECL. Half a year after the ECL came into force, we are pleased to provide an update incorporating what we learnt from working with various clients in understanding this new law and how to comply with it.
The ECL's key principles
- The framework. The ECL is the first comprehensive and consolidated export control law in China that provides for export controls in respect of dual-use items; military products; nuclear products; and other goods, technologies, services and items that relate to protecting national security and interests and fulfilling international obligations relating to non-proliferation, etc. (Controlled Items)
- Controlled goods and technology. Relevant departments designated by the State Council and the Central Military Commission (National Export Control Authorities or NECA), such as the Ministry of Commerce (MOFCOM), are responsible for the administration of the ECL. According to the ECL, the NECA will publish relevant control lists for the purposes of the ECL.
- Export licensing. The ECL requires exporters to obtain licenses to export Controlled Items. The ECL further notes that the licensing authorities will consider various factors when deciding whether to grant a license.
- End-user and end-use controls. Compared to the Dual-use Measures, the ECL further strengthens controls over end-users and the end-use of Controlled Items.
- Export prohibitions in respect of specific countries, entities or persons. The ECL permits the Chinese authorities to impose export prohibitions in respect of Controlled Items to safeguard national security interests and to fulfil international non-proliferation obligations, etc. The export prohibitions may also be imposed in respect of specific countries, regions, organizations or individuals.
- Deemed export, re-export and extraterritorial reach. The ECL not only applies to the cross-border transfer of Controlled Items from China, but also in respect of the provision of Controlled Items by PRC entities and individuals to foreign entities and individuals either within or outside of China.
In 1999, the China State Council issued the Regulations for the Administration of Commercial Encryption (Commercial Encryption Regulations). These regulations, along with subsequently issued notices, set out the regulatory framework and restrictions applicable to the import, export, use, sale, production and research of commercial encryption products and technologies in China, under the administration of the State Cryptography Administration (SCA).
Key compliance challenges and risks
Given that the ECL was enacted recently, we note that there exist areas (i) where the practical implementation of the ECL is slowly catching up with legislative changes; and (ii) where additional guidance on the interpretation of requirements is much needed. To help our readers better identify and navigate risks arising from export control law developments, we have set out some common pitfalls and challenges that we identified from working with clients across industries.
Businesses doing business in and with China are encouraged to carry out a holistic evaluation of the implications of the new ECL on their operations in order to manage their risks. As the implementation of the ECL progresses, more guidance, including in the form of implementing regulations, are expected to be published in the near future. As such, businesses should keep their fingers on the pulse of the latest developments in this area to ensure timely responses in the increasingly sophisticated compliance environment in China.
Jason Wen and Ivy Tan also assisted in preparing this alert.