China unreliable entity list

On September 19, China’s Ministry of Commerce (“MOFCOM”) issued the Regulations on Unreliable Entity List (“Regulations”), which took effect on the same date. Though we have not seen an actual list of unreliable entities, the Regulations set out the general principles for the Unreliable Entity List (UEL) system.

 

Who can be included on the UEL?

The Regulations apply to foreign entities, including foreign companies, organizations or individuals. A foreign entity engaging in activities that endanger China’s national sovereignty, security, or development, or that cause serious damage to the legitimate rights and interests of Chinese companies, organizations or individuals by suspending or terminating regular transactions with Chinese entities in violation of common market transaction rules or by adopting discriminative measures against Chinese entities.

 

Working mechanism

The Regulations authorize the organizations of a “working mechanism” (“UEL Office”) under the MOFCOM to administer the UEL system. The UEL Office will consist of certain central-level departments, which is expected to include government agencies such as the Ministry of Foreign Affairs, the Ministry of Public Security Bureau, State Administration for Market Regulation, China Customs and other relevant agencies.

 

Procedures for determining an unreliable entity

The UEL Office will announce the entities to be included on the UEL. When facts about the actions taken by a foreign entity are clear, the UEL Office may decide whether to include a foreign entity on the UEL by taking into account the factors listed below, without an investigation.

The UEL office may also initiate an investigation, either on its own or upon the suggestion or a report by “relevant “parties, before making the decision on whether a targeted entity should be added to the UEL. The foreign entity being investigated will have an opportunity to respond to the investigation and to defend itself.

The following are the factors to be considered for UEL designation:

  • The degree of harm to China’s interests of national sovereignty, national security and national development,
  • The level of damage to the rights and interests of Chinese companies or individuals,
  • Whether it complies with internationally accepted economic and trade rules and practices; and
  • Other factors that should be considered.

 

Consequences of being listed on the UEL

If a foreign entity is listed on the UEL, the UEL Office may adopt one or more of the following restrictive measures:

  • Restrict or prohibit the entity from importing and exporting to and from China.
  • Restrict or prohibit the entity from investing in China.
  • Restrict or prohibit persons or transportation vessels related to the entity from entering into the territory of China.
  • Restrict or cancel the work or residence permit of persons related to the unreliable entity.
  • Impose a monetary penalty on the unreliable entity.
  • Take other “necessary” measures.

The UEL Office may allow a grace period for a foreign entity to rectify its actions after it has been  included on the UEL but before the UEL actually takes restrictive measures. If by the end of the grace period, the foreign entity has taken the necessary steps to rectify its actions, then such entity can be removed from the UEL and no restrictive measures will be imposed. Otherwise, the entity will remain on the UEL and will be subject to restrictive measures.

 

Removal from the UEL

An unreliable foreign entity may be removed from the UEL under the following circumstances:

  • The facts based on which the unreliable entity determination was made have changed and the UEL Office removes the entity at its own initiative.
  • The entity makes the required corrections within the grace period; or
  • The entity files an application for removal and the UEL grants such removal based on its review.

Once removed from the UEL, any restrictive measure against the foreign entity will cease.

 

Implications for foreign entities doing business in or with China

It remains unclear how the UEL Regulations will be implemented in practice. For example, what exact government agencies will be part of the UEL Office or how the investigations will be conducted.

Though the Regulations only explicitly deal with foreign entities and do not appear to be directly applicable to Chinese subsidiaries of foreign entities, such subsidiaries will be impacted if their foreign parents are listed on the UEL. For example, if a foreign entity is listed on the UEL, the UEL Office could limit its Chinese subsidiary from exporting products to its parent company or revoke the work or residence permit of the foreign workers at those subsidiaries.

Companies must pay close attention to developments in this area and ensure that operations and business activities are legal and compliant. In tomorrow’s post we will discuss how you can reduce your chances of being deemed am Unreliable Entity, based not so much on the new UEL rules, but from our own experience on what has historically caused foreign companies to get on China’s “bad side.”