On July 3, 2020, the National People’s Congress (“NPC”) of China issued its second draft of the Export Control Law of China (the “Law”) for public comment, which must be submitted by August 16, 2020.1 The Ministry of Commerce of China (“MOFCOM”) issued the earliest draft of the Law in 2017, followed by the release of a revised version by the NPC in December 2019. Under Chinese law, the NPC must examine a pending legislation three times before it is passed. Therefore, the Law is ripe to be enacted this year after the current comment period closes.
The July 2020 draft makes certain substantive changes to the last version, as well as some clarifying adjustments in language and structure. Our summary of the key substantive changes is as follows:
1. Foreign End User/End Use Verification
The 2017 MOFCOM draft provided that export administrative authorities may conduct “on-site verifications” of foreign end users and end uses based on the circumstances. The 2019 NPC draft deleted that provision and would only require export administrative authorities to establish a “risk assessment” system for foreign end users and end uses and to “evaluate written proof” related to them. The latest draft strikes a middle ground by providing that the authorities will “evaluate” and “verify” foreign end users and foreign end uses.
2. Compliance Program/Discretionary “General Licenses”
The 2019 NPC draft provided that export operators shall have an internal compliance program. This provision has been revised to state that export operators having a well-functioning internal compliance program may receive discretionary “general licenses” as an incentive. Therefore, while failure to maintain an internal compliance program no longer implicates a potential violation of the Law under the latest draft, the general licensing scheme provides a significant practical incentive for exporters.
3. Third-Party Liability/Knowledge Standard
The 2019 draft provided that “knowingly” providing services for export operators’ activities in violation of export controls will subject the service provider to penalties. The latest draft clarifies that providing such services will be prohibited under the Law. However, unlike the penalty provision, this new provision does not reference the “knowledge” standard.
4. New Prohibition on “Export Control-Related Information”
The latest draft provides for a new prohibition that individuals and organizations within China shall not transfer “export control-related information” to outside of China in violation of Chinese law or endangering China’s “national security.”
5. Time for Dual-Use Licensing Decision
The latest draft deletes the requirement that the dual-use authority make its decision within 45 days of accepting an export license application, subject to a 15-day extension.
Other technical changes made in the July 2020 draft include:
- “Deemed Export” – The “deemed export” provision in Article 2 has been revised to contrast the concept of Chinese citizens, legal persons and non-legal person organizations (all of which are terms of art under Chinese law) with the reference to foreign organizations and individuals. Interested parties should pay attention to the definitions of legal persons and non-legal person organizations as provided in China’s new Civil Code. If these definitions are met, an entity is considered to be Chinese, not foreign, for purposes of the Law.
- Dual-Use Exporter Qualification – The latest draft clarifies that there is no intent to establish an elaborate special “permit” system to pre-qualify which parties in China may engage in the export of dual-use items. Currently, exporters of dual-use items, except otherwise required by law, are only required to apply for a registration, which is much less burdensome than a special permit system. By contrast, defense and nuclear articles and certain specially monitored chemical products are subject to special permit systems. Special permits are similar to special business licenses, which may be restricted to state-owned enterprises only and are usually expensive and time-consuming to get. For example, government inspection of a party’s facilities is frequently required before a special permit may be granted.
- Temporary Control for National Security – Regarding temporary control for national security reasons, the latest draft newly provides that such temporary control must be published and that a reevaluation would be conducted before the expiration of the temporary control. The reevaluation would decide whether the temporary control should be revoked or extended or the relevant item should be added to an export control list.
- Mandatory Notice by Chinese Customs to Exporters – The 2019 draft provided that if Chinese Customs suspects a shipment of violating Chinese export control rules, Chinese Customs may either notify the exporter or consult with export control authorities, such as MOFCOM, as to whether a violation has occurred or will occur. The latest draft obligates Chinese Customs to notify the exporter of the issue, but consultation with other agencies will remain at Chinese Customs’ discretion.
We will be happy to discuss any further questions you may have.
1 See Attachment 1.