On 19 September 2020, China's Ministry of Commerce (MOFCOM) published the Provisions on the Unreliable Entity List (Order No.4 of 2020) (provisions), which immediately came into effect. It has been over one year since MOFCOM first introduced the idea of the Unreliable Entity List (UEL) at the end of May 2019. While MOFCOM has not yet named any parties to the UEL, the purpose of the UEL is to designate foreign entities that have put China's national sovereignty, security, and development interests in danger by suspending transactions with Chinese entities or by applying discriminatory treatment against Chinese entities. Listed entities also may be subject to penalties.
Significantly, it appears the provisions can be applied extraterritorially, in other words, penalties can be imposed at the conducts of foreign entities outside China.
The provisions demonstrate how China will manage the list while there is no clear timeline for the release of the UEL or potential candidates.
Who will be listed?
Foreign entities (including enterprises, other organizations, or individuals of a foreign country), could potentially be captured by the UEL, if they have taken actions "in international economic, trade and other relevant activities" that:
- Endanger the national sovereignty, security, or development interest of China.
- Suspend normal transactions with a Chinese enterprise, other organization, or individual, or apply discriminatory measures against such Chinese entity, which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of a Chinese enterprise, other organization, or individual.
Furthermore, the provisions provide a nonexclusive list of factors which will be taken into consideration when deciding whether to add one entity to the UEL. These factors include:
- 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 organizations, or individuals of China.
- Whether the actions are in compliance with internationally accepted economic and trade rules.
- Other factors that shall be considered.
Absent further interpretation or guidance, it appears that the provisions do not provide a safe harbor for foreign entities who took the actions mentioned above, in order to comply with sanction orders by other countries. The catch-all clause also grants the government broad discretion when making its decisions.
How will decisions to list a party be made?
To manage and enforce the UEL, China will establish a dedicated working mechanism composed of relevant departments of the central government (working mechanism). The general office of the working mechanism is deployed at MOFCOM. The working mechanism may decide to include one entity to the UEL, with or without an investigation.
Decision after investigation
The working mechanism may initiate an investigation against a foreign entity on its own, or based on suggestions or reports filed by other stakeholders. Once it decides to proceed with the investigation, it should make such decision public while the provisions are silent about when and where such announcement will be made.
During the investigation, the working mechanism may inquire the relevant parties and review relevant documents, as well as take other necessary means. The entity will also have the opportunities to make statement and defend its case during the investigation.
Based on the actual circumstances, the working mechanism may decide to suspend (with the possibility to resume in case the facts have changed substantially) or terminate the investigation.
Decision without investigation
Where the facts are clear in one case, the working mechanism may, without conducting any investigation, decide to add a foreign entity to the UEL. The provisions do not clarify what would be considered as "clear facts" and it appears that the entities concerned will not have the opportunity to defend themselves before being listed. This is also similar to processes by which the U.S. government makes decisions to list parties in certain cases with no advance notice.
What are the consequences of being listed?
Where the working mechanism decides to include a foreign entity into the UEL, no matter with or without investigation, it will make its decision public. In such decision, the working mechanism may choose to alert the risks of conducting transactions with the concerned entity, and may choose to give a grace period for the entity to rectify its actions.
The working mechanism may decide to adopt one or more of the following measures in the below nonexclusive list (each a "punitive measure") against the listed entities:
- Restrict or prohibit it from engaging in China-related import or export activities.
- Restrict or prohibit it from investing in China.
- Restrict or prohibit its relevant personnel or vehicles from entering into China.
- Restrict or revoke its relevant personnel's work permit, status of stay, or residence in China.
- Impose a fine of the corresponding amount according to the severity of the circumstances.
- Other measures.
If a grace period is provided in the listing decision of the working mechanisms, the above measures will only be implemented when the entity fails to rectify within the specified time limit.
Will approvals or exemptions be granted for transactions with listed parties?
It may be possible to seek exemptions on a case-by-case basis. Where it is indeed necessary for a Chinese entity to conduct transactions with a listed foreign entity that is restricted or prohibited from engaging in China-related import or export activities, the Chinese entity may apply to the general office of the working mechanism and seek its approval before it can proceed with such transaction.
What is the procedure to seek delisting?
If the concerned entity rectifies its action within the grace period and adopts measures to eliminate the consequences of its actions, it is provided that the working mechanism should remove such foreign entity from the UEL. That said, it is still at the discretion of the working mechanism whether such rectification and remedial measures are to its satisfaction.
The working mechanism may also proactively decide to remove a foreign entity from the UEL based on the actual circumstances or upon the application of the related foreign entity.
The decision of removing a foreign entity off the UEL should also be made public and the imposed punitive measures should also cease to apply immediately upon such announcement.
How will MOFCOM use the UEL and what are the implications of these provisions?
In its replies to journalists; questions on the provisions, MOFCOM has stressed that the UEL will not be applied without caution and the scope will not be enlarged arbitrarily. It also emphasized that nothing has and will stop China from widening and deepening its opening-up policy. MOFCOM also dismissed accusations of targeting U.S. companies as it only seeks to punish the foreign entities in violation of the provisions and said that China continues to welcome foreign investors.
That being said, the provisions were published as the trade and tech war between China and the United States continues to escalate. As mentioned above, suspension of dealing with Chinese entities or discriminatory treatment against Chinese entities are not exempted from the UEL, even if the concerned entities were trying to comply with sanction orders of a foreign country or government. Considering the sanctions and export controls ramped up by the United States over various Chinese entities, U.S. companies and other foreign entities that conduct business in or with China, are caught between the crosshairs of both the Chinese and U.S. governments.
For multinational companies that have already made great efforts addressing conflicting sanctions and export controls regimes, the provisions and the UEL will be another important regime on the watch list. Companies should closely monitor the development of the UEL and navigate ways to ensure compliance with both Chinese laws and laws in other jurisdictions.