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Seven FAQs About China's New Unreliable Entity List Provisions By Frank Jiang, Scott Yu 2020-09-23

 

On September 19, 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) unveiled the long-awaited Provisions on Unreliable Entity List (“UEL Provisions”) with immediate effect. It is viewed as the Chinese version of the Entity List to institutionalize Chinese government’s power to take more targeted countermeasures in response to the escalation of the US Export Controls and Sanctions. The UEL Provisions formally introduce the mechanism of the Unreliable Entity List (“UEL”), which was first publicly discussed in May 2019.

 

The Q&As below highlight several key practical implications for multinational companies.

 

 

1、What conducts may land you on the UEL?

 

A foreign entity[1] may land on the UEL if in the course of “international economic and trade activities and related activities” it engages in[2]:

 

1) conducts which endanger China’s national interests (in terms of sovereignty, security and development) (the “National Interest Endangerment Test”);

 

2) the following conducts which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of such PRC Entity (the “Individual Serious Harm Test”):

 

  • a) interrupting normal transactions (e.g. boycott,[3] supply cut-off) with a conducting the following conduct(s) against a Chinese enterprise, other organization or individual (collectively, “PRC Entity”);

  • b) taking discriminative measures against a PRC Entity.

 

(collectively, the “Covered Conducts”)

 

For now, it is unclear whether a conduct needs to both satisfy National Interest Endangerment Test and Individual Serious Harm Test to be subject to the UEL mechanism. Another key question is to what extent the refusal to enter into a transaction or suspending goods/services supply under existing contract in order to comply with a foreign law and/or government order will be considered as violation of “normal market transaction principles”.

 

 

2、What factors will be considered for a UEL decision?

 

Following are the factors to be considered for a UEL decision[4]:

 

(1) the extent of endangerment to the PRC national interests;

 

(2) the extent of harm to the affected Chinese entity or entities;

 

(3) whether or not the conduct at issue is consistent with generally practiced international economic and trade rules;

 

(4) other factors that shall be taken into consideration.

 

(collectively the “Decision Factors”)

 

 

3、How will a UEL case proceed?

 

A UEL case generally has two steps: (1) factual investigation of the conduct(s) at issue, i.e., whether such conduct is a Covered Conduct, and (2) decision after comprehensive consideration of the Decision Factors.

 

Investigation step

 

Generally, after preliminary assessment upon recommendation from other government organs, third-party complaints or on its own initiative, the Working Mechanism may decide to make an announcement for launching the investigation (“Investigation Announcement”) against the foreign entity concerned[5]. During the investigation, the foreign entity concerned can make statements and defenses, and may even file a suspension application, which is designed to “protect the due process interest for the alleged foreign entity”.[6]

 

However, under certain special circumstance, i.e., if “conduct of the relevant foreign entity is factually clear”, the Working Mechanism can fast track the process by skipping the investigation step and proceeding to assess the Decision Factors.[7]

 

Decision step

 

Once the relevant facts concerning the alleged conducts are established, the Working Mechanism will comprehensively consider the Decision Factors when deciding on whether to put the foreign entity concerned onto the UEL and the sanctions to be imposed; the decision will be announced to the public (“Decision Announcement”)[8].

 

While the UEL Provisions do not expressly list any available defenses, the extent of effort by the foreign entity concerned to avoid or terminate the conduct at issue will likely be taken into consideration under item (4) of the Decision Factor as a mitigating factor.

 

 

4、What will happen once you are on the UEL?

 

Once on the UEL, the foreign entity can be categorized as a “risky counterparty”, which will cause a significant reputational damage[9], and be subject to one or more of the following sanction measures through a separate public announcement (“Sanction Announcement”)[10]:

 

(1) PRC-related import or export activities restriction or prohibition;

 

This measure is comparable to the function and effect of the US Entity List and OFAC sanctions. In the most severe form, the listed unreliable entity cannot obtain any Chinese product, technology or service or make any sale on Chinese market or with Chinese entity. Considering the severity of this measure, the UEL Provisions also established a special licensing procedure, allowing a Chinese Entity to continue transacting with the listed foreign entity upon approval.[11]

 

(2) PRC investment restriction or prohibition;

 

Under this measure, the ongoing and potential PRC investment activities of the listed entity will be subject to close regulatory scrutiny and it is unclear if their past investment transactions may also be subject to any retrospective review (like CFIUS mechanism).

 

(3) personnel or means of transportation entry restriction or prohibition;

 

(4) restriction or revocation of the relevant personnel’s work permit, eligibility for stay or residence in China;

 

(5) a fine (depending on severity of the circumstances);

 

(6) other necessary measures.

 

Such sanction measure(s) may be effective immediately upon the Sanction Announcement or be subject to a Correction Period (See Question 5 below).

 

 

5、How to get off the UEL?

 

The Decision Announcement may provide a correction period (“Correction Period”) for the listed foreign entity, during which the sanctions will be stayed. In such case, the listed foreign entity can get off the UEL if it corrects the conduct at issue and takes measures to eliminate the consequences of such conduct during the correction period.

 

In addition, a listed foreign entity can apply with the Working Mechanism for removal from the UEL at any time, and the Working Mechanism may also make the decision ex officio to delist entity based on the “actual circumstances”.

 

In either case, the delisting decision will be announced and the sanction measure(s) will terminate upon the delisting announcement.[12]

 

 

6、Who is responsible for implementing the UEL?

 

A new working mechanism consisting of the relevant departments of the central state agencies (“Working Mechanism”), probably involving departments under ministries for commerce, foreign affairs, national security, public security, customs, immigration etc., is responsible for implementing the UEL.[13]

 

The working office of the Working Mechanism is set under MOFCOM. This seems a natural arrangement, as MOFCOM is also tasked with foreign investment regulation, importation and exportation administration, trade remedy investigation and negotiation.

 

 

7、Is there any targeted foreign entity to be imminently put on the UEL?

 

In its press Q&A on September 20, 2020, MOFCOM stated that there is no timetable and list of target unreliable entities on hand for now, and emphasizing that the UEL listing will be “strictly limited to only few foreign entities that break market norms and violates the applicable laws and regulation”.[14]

 

However, there is a fast-track for the UEL listing under the UEL Provision (see Question 3 above), under which a targeted foreign entity may be put on the UEL if “the conduct at issue is factually clear”, in which case a sanction decision can be made without going through a factual investigation step. 

 

[注] 

[1] For the purpose of the UEL Provisions, a “foreign entity” includes a foreign enterprise, other organization or individual.

[2] Article 2 of the UEL Provisions.

[3] MOFCOM issued a response to press inquiries on the UEL Provisions on September 20, 2020. See Question 5 of Heads of MOFCOM Department of Treaty and Law Answers Questions on the UEL Provision dated September 20, 2020, available at http://www.mofcom.gov.cn/article/news/202009/20200903002631.shtml.

[4] Article 7 of the UEL Provisions.

[5] Article 5 of the UEL Provisions.

[6] See Question 2 of Heads of MOFCOM Department of Treaty and Law Answers Questions on the UEL Provision dated September 20, 2020.

[7] Article 8 of the UEL ProvisionsS.

[8] Article 7 of the UEL Provisions.

[9] Article 8 of the UEL Provisions.

[10] Article 10 of the UEL Provisions.

[11] Article 12 of the UEL Provisions.

[12] Article 9, 11 and 13 of the UEL Provisions.

[13] Article 4 of the UEL Provisions.

[14] See Question 1 of Heads of MOFCOM Department of Treaty and Law Answers Questions on the UEL Provision dated September 20, 2020.

 

End