China’s Ministry of Commerce Publishes “Unreliable Entity List” Provisions

Targeted Activities Triggering UEL Designation

According to the UEL Provisions, the UEL system shall be established and relevant measures shall be adopted in response to the following actions taken by a “Foreign Entity” (an enterprise, other organization or individual of a foreign country) in international economic, trade and other relevant activities:

1. endangering national sovereignty, security or development interests of China;
2. suspending normal transactions with a Chinese enterprise, other organization, or individual of China or applying discriminatory measures against an enterprise, other organization, or individual of China, which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of the enterprise, other organization, or individual of China.

The UEL Provisions do not specify whether a foreign entity or individual that suspend or stop conducting normal business with Chinese companies in order to comply with any applicable foreign laws, regulations or government orders is considered to covered by the above-described targeted activities.

Working Mechanism

Under the UEL Provisions, a working mechanism composed of relevant central governmental authorities (Working Mechanism) is to be established to take charge of organization and implementation of the UEL system. The Working Mechanism is authorized under the UEL Provisions to decide to announce investigations on the actions taken by the relevant Foreign Entity based on its administrative duties and functions or upon suggestions or reports by relevant parties. The Office of the Working Mechanism is located at the competent department of commerce of the State Council. (We understand that it should be at MOFCOM).

Factors to be Considered for UEL Designation

The Working Mechanism will make a decision on whether to designate the relevant Foreign Entity to the UEL on basis of the results of the investigation and by taking into overall consideration the following factors:

1. the degree of danger to national sovereignty, security or development interests of China;
2. the degree of damage to the legitimate rights and interests of enterprises, other organizations, or individuals of China;
3. whether being in compliance with internationally accepted economic and trade rules; and
4. other factors that shall be considered.

Where the facts about the actions taken by the Foreign Entity are clear, the Working Mechanism may directly make a decision on whether to designate such Foreign Entity to the UEL by taking into account these factors (i.e. no investigation will be conducted under this scenario).

Restrictions or Prohibitions on the Foreign Entities Designated in the UEL

If a Foreign Entity is designated to the UEL, one or more of the following measures will be decided and announced by the Working Mechanism to be imposed on Foreign Entity:

1. restricting or prohibiting the Foreign Entity from engaging in China-related import or export activities;
2. restricting or prohibiting the Foreign Entity from investing in China;
3. restricting or prohibiting the Foreign Entity’s relevant personnel or transportation vehicles from entering into China;
4. restricting or revoking the relevant personnel’s work permit, status of stay or residence in China;
5. imposing a fine, according to the severity of the circumstances; and
6. other necessary measures.

In the announcement in which the relevant Foreign Entity is designated to the UEL, the Working Mechanism may include an alert about the risks of conducting transactions with the designated Foreign Entity. The designation announcement may also set forth a curing period for the Foreign Entity to rectify its actions. During such curing period, the above measures will not be implemented against the Foreign Entity but if the Foreign Entity fails to rectify its actions during the curing period, the above restrictions or prohibitions will be imposed on the Foreign Entity.

Removal from UEL

A Foreign Entity may apply for its removal from the UEL and the Working Mechanism shall decide whether to remove it based on actual circumstances. Where the relevant Foreign Entity rectifies its actions within the curing period set forth in the designation announcement and takes measures to eliminate the consequences of its actions, the Working Mechanism will make a decision to remove it from the UEL.

Exceptions

If a Foreign Entity is designated to the UEL and is restricted or prohibited from engaging in China-related import or export activities, Chinese enterprises, other organizations or individuals shall not conduct import and export transactions with such designated Foreign Entity. The UEL Provisions provide an exception where, under special circumstances, it is necessary indeed for an enterprise, other organization, or individual of China to conduct transactions with the Foreign Entity that is restricted or prohibited from engaging in China-related import or export activities, such Chinese party can submit an application to the office of the Working Mechanism. If the office of the Working Mechanism approves the transaction, the Chinese party can continue to undertake the transactions with the Foreign Entity according to the approval.

Recommendations

In May, 2020, state-owned media outlet Global Times said that China could put companies like Apple, Qualcomm and Cisco on the UEL in retaliation for U.S. restrictions on Huawei. However, as of the date of this article, the UEL has not been published and no actual designation has been made. MOFCOM indicated in a press conference that it did not specify the timeline for the release of the UEL, nor did MOFCOM specify the entities to be listed in the UEL.

MOFCOM further indicated that the UEL does not specifically target U.S. companies and that it has no intention to target any particular countries or entities. China would continue to welcome foreign investors, opening its economy by deepening market reforms.

Coincidentally, one day after MOFCOM published the UEL Provisions, recent developments related to WeChat and TikTok delayed the previously scheduled September 20 implementation of the new rules published by U.S. Department for implementing the executive orders that ban WeChat and TikTok. The business communities are waiting to see how the UEL Provisions might be implemented in the highly politicized business environment created by the tensions between U.S. and China. Certain analysts believe that the language used in the UEL Provisions provides the Working Mechanism with room for discretionary actions. The release of the UEL Provisions is also seen as a warning from MOFCOM that certain actual designations might be made if tensions between China and certain Western countries on trade and technologies escalate.

Multinational companies with operations related to China and companies with operations in both U.S. and China will need to navigate compliance with U.S. export control and trade restrictions as well as China’s UEL Provisions and other export control laws and regulations to assess risks of their cross-border transactions. Chinese companies whose productions and business rely on foreign supplies should carefully review their supply chains and take actions to seek alterations and reasonable inventory.

The UEL Provisions do not include legal consequences for violation by any Chinese parties that continue to undertake prohibited or restricted transactions with the designated Foreign Entity in the UEL.

China published a draft Export Control Law in June 2017 that introduced a blacklisting system similar to the UEL. The second draft of the law was published for public comment in December 2019. On June 28, 2020, a new draft of the Export Control Law was submitted to the Standing Committee of the National People’s Congress for a second review and is expected to be enacted within 2020. If enacted, the law may impose restrictions on transactions with UEL-designated entities, including prohibiting exports of Chinese-origin controlled items to UEL-designated entities, revoking export licenses related to transactions with such entities and imposing fines. China has just updated its Catalogue of Technologies Prohibited and Restricted from Export to enhance the protection of China’s self-innovated new high technologies.

Companies should pay close attention to the legal and policy developments related to China in various jurisdictions and establish compliance plans and training programs in response to the developments.

We will closely monitor developments and provide updates as more information is released.