The Regulations consist of six chapters, setting forth the details for the scope of application of the dual-use items, control policies, specific control measures (licensing, management on end-use and end-user and restricted party lists), supervision and inspection, and legal liabilities for violation of the Regulations. Given the importance and legal standing, many refer to the Regulations as the Chinese counterpart to the U.S. Export Control Regulations (“EAR”) administered by the Bureau of Industry and Security (“BIS”) of the U.S. Department of Commerce. We set forth below the key highlights of the Regulations that worth companies’ attention and provide some compliance recommendations for companies’ consideration.
A step forward to enhance integration of dual-use items control
As the fundamental legislation governing the export control regime in China, the ECL stipulates that the application and administration of the export control of dual-use items shall follow not only the ECL but also all other applicable regulations for different types of dual-use items. Currently, these regulations are fragmented and dispersed across several different legislative instruments, making it difficult to coordinate the administration of export control on dual-use items.
After the Regulations come into force on December 1, 2024, the export controls on dual-use items including the dual-use nuclear products, unspecified missile-related items, dual-use biological products and related equipment and technologies, relevant chemical products, and other products will be implemented pursuant to the Regulations and the individual regulations previously issued to govern those items will be repealed accordingly.1
In addition, China’s Ministry of Commerce (“MOFCOM”) stated in an industry conference held by China Chamber of Commerce for Import and Export of Machinery and Electronic Products on November 4, 2024 that it is reviewing the existing export control catalogues of dual-use items and aims to reshape the catalogue of controlled dual-use items to accommodate the implementation of the Regulations and establish the equivalent of an Export Control Classification Number (“ECCN”) system to classify and categorize the controlled dual-use items. MOFCOM’s contemplated ECCN is likely to resemble the Commerce Control List of the EAR, as it is also a five-character alpha-numeric designation identifying the item’s industry, product type, reason for control, and sequencing numbers.
Scope of application of the regulations
Article 2 of the Regulations provides definitions of “dual-use items” and “export control” in a manner consistent with the existing provisions under ECL –
- “Dual-use items” refer to goods, technologies, and services that can be used for both civil and military purposes or are conducive to enhancing military potential, especially those that can be used to design, develop, produce, or use weapons of mass destruction and the means of delivery thereof, including relevant technical information and other data.
- “Export control” refers to the prohibitive or restrictive measures taken by the State on the (i) transfer of dual-use items from the territory of China to overseas parties; and (ii) provision of dual-use items by Chinese citizens, legal persons, and non-incorporated organizations of China to foreign organizations and individuals. In addition, the transit, transshipment, transportation and re-export2 of dual-use items or the export of dual-use items from the areas under special Customs supervision and bonded supervisory areas to overseas will also be governed by the ECL and the Regulations.
In addition, the Regulations is the first time that a legislative document in China imposes extraterritorial export controls on certain dual-use items, although on a relatively limited basis. Per Article 49 of the Regulations, the transfer or provision3 of the following goods, technologies, and services (with services as yet undefined) outside of China by overseas organizations or individuals to specific destination countries and regions4 or specific end users5 would be also subject to the Regulations.
- dual-use items manufactured outside of China that contain, integrate, or commingle specific dual-use items originating in China (which resembles the “De Minimis” rule under the EAR but yet does not specify the de minimis threshold of Chinese-origin items as the EAR);
- dual-use items manufactured outside the territory of China by using specific technologies and other such dual-use items originating in China (which resembles the “Foreign Direct Product” rule under the EAR but yet does not identify which specific technologies and dual-use items would trigger such rule); and
- specific dual-use items originating in China.
While the Regulations do not provide further details of the said items and how this will be enforced in practice, one reasonable speculation is that this expands the covered scope of items being subject to Chinese export control and leaves discretion to MOFCOM to impose license requirement when certain dual-use items are transferred among foreign countries and foreign end-users.
Licensing policies under the regulations
Consistent with the ECL, the Regulations reaffirm that China adopts a licensing system for the export of dual-use items and further clarify the types and applicable conditions for such export licenses. The Regulations provide for 3 types of export licenses/certificates – (i) single licenses, (ii) general licenses, and (iii) export certificates by information registration.
- Single License: A single license may allow an exporter, within the scope, conditions, and period of validity specified in the export license, to export specific dual-use items to a single end user. The period of validity of a single license shall be no more than one year, and the export license shall be invalidated automatically if the export is finished within the period of validity.
- General License: A general license will allow an exporter, within the scope, conditions, and period of validity specified in the export license, to export specific dual-use items multiple times to a single or multiple end users. The period of validity of a general license shall be no more than three years. Only exporters who (i) have established a well-functioning internal compliance program for the export control of dual-use items, (ii) have relevant records of dual-use items export and (iii) have relatively fixed export channels and end users, may apply for a general license.
- Export Certificate by Information Registration: Where the export of specific dual-use items meets certain circumstances as prescribed in the Regulations6, the exporter can export the dual-use items after obtaining an export certificate by registering the information prior to each export. It is worth noting that the export certificate by information registration is implemented for the first time in the Regulations, which creates a simplified option for exports of dual-use items for a temporary use abroad (e.g. exhibition, repair and maintenance) that shares some similarities to the License Exception TMP under the EAR.7
End user and end use management
With respect to the end user management, the Regulations expressly mention two types of restricted party lists – (i) the List of Parties of Concern, and (ii) the Controlled Parties List.
List of parties of concern
On top of the ECL, for the first time the Regulation further refines the management of end users and end uses by establishing an export control “List of Parties of Concern” that applies to importers and end users who “fail to cooperate in the verification process or to provide relevant proofs within the prescribed time limit, making it impossible [for Chinese government agencies] to verify the end users or end uses of dual-use items,” which, as noted by some, resembles the Unverified List (“UVL”) of the EAR.
The Regulations also set forth a statement requirement in Article 26.2 that is similar to the one imposed on UVL entities pursuant to Section 744.15 of the EAR and stipulates additional restrictions and license review policy for export applications of dual-use items in relation to the importers and end users included in the List of Parties of Concern. Specifically, (i) exporters cannot apply for a general license or obtain export certificates in the form of information registration when exporting dual-use items to such importers or end users; (ii) exporters shall submit their risk assessment report on such importers and end users when applying for a single license, and make a commitment to complying with the laws and regulations and relevant requirements on export control; and (iii) the review period of the application for exporting dual-use items to such importers or end users is not subject to a normal timeframe, which is usually 45 working days.
Controlled parties list
The Controlled Parties List is similar to a combination of the Entity List and the Denied Persons List under the EAR.
Per Article 28 of the Regulations, MOFCOM may, either ex officio or according to the suggestions or whistleblowing from relevant parties, decide to include an importer or end user in the Controlled Parties List if the importer or end user is (i) in violation of requirements for the administration of end users or end uses; (ii) being likely to endanger the national security and interests; (iii) using dual-use items for any terrorist purpose; (iv) using dual-use items for the design, development, production, or use of weapons of mass destruction and the means of delivery thereof that endangers the national security and interests of China; or (v) due to actions that are found to endanger the national security and interests of China, subject to prohibitions or restrictions of relevant transactions or cooperation and other measures taken by the relevant authorities of the State in accordance with the laws. The circumstances (i) – (iii) listed above are already provided for in the ECL, and circumstances (iv) – (v) are newly included in the Regulations. Scenario (v) is inferred that parties designated in accordance with the Provisions on the List of Unreliable Entities (“UEL Provisions”) and the Anti-foreign Sanction Law (“AFSL”) may also be included in the Controlled Parties List under the Regulations.
Consistent with the ECL, parties designated on the Controlled Parties List, depending on the seriousness and specific situations, would be subject to one or more of the restrictive measures, including (i) prohibiting any trade in dual-use items; (ii) restricting any trade in dual-use items; (iii) ordering to suspend relevant dual-use items export; and (iv) other necessary measures.
Removal mechanism and recordkeeping
The Regulations provide a removal mechanism for both the List of Parties of Concern and the Controlled Parties List. Parties included in the above-restricted party lists may be removed if they cooperate with relevant investigations and verifications, cease violations of the law, take remedial measures to eliminate harmful consequences, and make and fulfill commitments as required.
In addition, the Regulations provide for a mechanism to transfer a party from the List of Parties of Concern to the Controlled Parties List when an importer or end user included in the List of Parties of Concern falls under any of the circumstances of Article 28 discussed above, which is similar to the action where BIS may remove a party from the UEL to the Entity List if it cannot verify the bona fide end use and end user within 60 days from the entity being listed in the UVL.
Lastly, the Regulations set a five-year minimum recordkeeping requirements for documents related to end users and end uses, including retention of relevant contracts, invoices, account books, documents, business letters, and other relevant materials. Said recordkeeping time requirement was not expressly stipulated in the ECL and other related regulations before.
Prior approval required from MOFCOM regarding receiving export control related visits and on-site inspections of foreign government
The Regulations set forth in Article 38 that upon receiving a request from a foreign government for activities like visits or on-site inspections related to export control, a Chinese party (including citizens, legal persons, and organizations of China) shall report such a request to MOFCOM immediately. Without MOFCOM’s consent, the Chinese party shall not accept or commit to accepting the said visits or on-site inspections from foreign governments, otherwise, it may be subject to penalties including monetary fines or suspension from business.
Such requirement is not new and in fact, MOFCOM has made same requirement as early as in its Order No.60 of 2007.8 It is seen as an emphasis by the Chinese government in the midst of U.S.-China enforcement actions when it formally includes this prior-approval requirement in the level of administrative regulations. In practice, MOFCOM also has long adhered to this approach. For example, when some Chinese companies apply for a removal of the UVL and thus agree to accept the end-use and end-user check by the BIS, Chinese companies normally would need to notify MOFCOM in advance and obtain an approval for such onsite review.
Compliance recommendations
As mentioned above, the Regulations set forth a series of new norms for the export control of dual-use items in China, including the scope of application, licensing policies, end user and end use management, restricted party lists, recordkeeping, and so on. Compared with the ECL, the Regulations have provided detailed provisions for implementing and enforcing China’s export control practice. For international companies that have business operations related to export-import in China, it is highly recommended to review existing business processes and systems and implement the necessary actions to comply with ECLs and Regulations to avoid the threat of being added to the Parties of Concern or Controlled Parties lists.
- Enhancing pre-transaction due diligence of parties: conducting thorough background checks on customers and end-users to make sure the customer/end user is not included in any of China’s restricted parties list. Understand the jurisdiction and licensing requirement of dual-use items to be exported to foreign parties.
- Enhancing pre-transaction due diligence of items: Reviewing the items to determine if they should be considered dual-use items under the Regulations and the appropriate classification if so.
- Enhancing end user and end user management: following the statutory obligations under end-user and end-use management in the Regulations, monitoring changes to the end-user and end-use of any controlled dual-use items, and implementing the corresponding compliance procedures and steps to avoid any violation of the Regulations.
- Reviewing internal business flow and conducting trade compliance risk mapping: reviewing business concerning export and import business related to China, assessing whether there are any underlying risks in terms of items, destinations, end users and end uses, and export licensing, and making improvement on compliance measures to mitigate the risk exposure.
- Updating relevant contracts and transaction terms: reviewing, inserting, and updating relevant clauses of contracts involving imports and exports related to China for compliance with ECL and the Regulations.
- Establishing a comprehensive recordkeeping mechanism: establishing a comprehensive recordkeeping mechanism for transactions involving imports and exports related to China, especially files and records related to end user and end use management.
- Monitoring relevant legislative and enforcement developments on an ongoing basis: While the Regulations have made key refinements on top of the ECL, there are still contents that have yet to be clarified. Companies are advised to monitor any upcoming implementing guidance and enforcement developments to keep abreast of the latest compliance requirements and formulate necessary compliance measures in a timely manner on that basis.
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Hogan Lovells would be able to assist you with the recommendations above. Please let us know if you have any questions or need assistance with the matters discussed above.
Authored by Roy Zou, Ben Kostrzewa, Stephanie Sun, Flora Feng, and Xiaoxian Wan.
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