China Introduces Provisions On The Unreliable Entity List.
Legal News & Analysis - Asia Pacific - China - Regulatory & Compliance
5 October 2020
China first announced its proposed ‘unreliable entity list’ in May 2019, but details were not provided at the time and its implementation was put on hold pending trade negotiations with the United States. On 19 September 2020, the Provisions on the Unreliable Entity List (Provisions) were approved by the China State Council and immediately came into effect. Set out below is an overview of how the regime will function according to the Provisions.
The stated purposes of the Provisions are to (a) safeguard national sovereignty, security and development interests; (b) maintain fair and free international economic and trade order; and (c) protect the rights and interests of Chinese enterprises and people.
The Provisions are formulated in accordance with China’s existing Foreign Trade Law and National Security Law.
The new Provisions have a broad potential scope, applying where a foreign entity takes action in international trade or related activities which:
· endangers the national sovereignty, security or development interests of China; or
· suspends normal transactions with or applies discriminatory measures against an enterprise, other organisation, or individual of China, which violates normal market transaction principles and causes serious damage to their legitimate rights and interests.
A “foreign entity” refers to an enterprise, other organisation, or individual of a foreign country.
Enforcement mechanisms are not yet established but the Provisions provide for these to be setup. A working panel, based within MOFCOM but composed of relevant central departments, will implement the system and assess which foreign entities should be classified as an unreliable entity.
This panel has the discretion to investigate foreign entities, either on its own initiative or based on referral from other relevant parties. The commencement of investigations will be public.
During the investigation, the working panel can gather evidence, including seeking input from involved parties and compelling the production of relevant documents and materials. The foreign entity under investigation will have the opportunity to present a defence. The Provisions are general in nature and the specifics of how this process will work are not clear.
When deciding whether the foreign entity will be included into the list, the panel will consider the following factors:
· the degree of danger to national sovereignty, security or development interests of China;
· the degree of damage to the legitimate rights and interests of enterprises, other organisations, or individuals of China;
· whether the foreign entity is complying with internationally accepted economic and trade rules; and
· any other factors that the panel takes the view should be considered.
No guidance is provided on what “other factors” may be considered.
A decision to place a foreign entity on the unreliable entity list will be publically announced by the panel. The panel can impose a time limit, during which the foreign entity must rectify the relevant conduct or face sanctions.
The sanctions arising from being placed on the unreliable entity list can vary and will ultimately be determined by the panel, who holds a broad discretion. Possible measures include:
· restricting or prohibiting the foreign entity from engaging in China-related import or export activities;
· restricting or prohibiting the foreign entity from investing in China;
· restricting or prohibiting the foreign entity’s relevant personnel or means of transportation from entering into China;
· restricting or revoking the relevant personnel’s work permit, stay or residence permit in China;
· imposing a fine of appropriate amount according to the severity of its actions; and
· other measures the panel considers necessary.
No guidance is provided on what “other measures” may include.
Exemption can be sought by Chinese trading partners in “special circumstances” to allow a commercial relationship with an entity on the unreliable entity list to continue. The panel will receive and decide these applications.
The panel can decide to remove the foreign entity from the list. If the foreign entity takes corrective action within the time limit specified in the announcement, the working panel will remove it from the list. A foreign entity can also apply for removal. The decision to remove the foreign entity from the list will be made public.
The Provisions are high level and their impact will be determined by how they are implemented. Responding to questions on the breadth of the Provisions’ potential application, MOFCOM has said that the Provisions have been introduced to provide a forward looking framework and are not intended to target any particular country or foreign entity. In making decisions on whether to include a foreign entity into the list and whether to impose any of the sanctions available, it has been said that the working panel will act transparently and in accordance with the factors identified in the law.
For further information, please contact:
Jeremy Birch, Herbert Smith Freehills