Regulations issued on Unreliable Entity List

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Regulations-issued-on-Unreliable-Entity-List

On 19 September 2020, the Ministry of Commerce (MOFCOM) issued the Regulations on Unreliable Entity List (UEL regulations), which took effect on the same date. While MOFCOM has not named any specific foreign entity to be included on the list, the UEL regulations set out the principles for the implementation of the UEL system as summarised below.

What entities will be included in the UEL?

The UEL consists of foreign persons (enterprises, organisations or individuals) that engage in certain activities endangering China’s national sovereignty, security or development, causing serious damage to the legitimate rights and interests of Chinese enterprises, organisations and individuals by suspending normal transactions outside of normal market trading principles, or applying discriminatory measures.

What will be the consequences of the UEL?

Being listed on the UEL may trigger the application of various restrictive or prohibitive measures, including: (1) restrictions or prohibitions on China-related import or export activities; (2) restrictions or prohibitions on investment in China; (3) restrictions or prohibitions on relevant personnel or transport vehicles from entering into China; (4) restrictions or revocation of the relevant personnel’s work permit, qualification for stay, or residence in China; (5) a fine of the corresponding amount according to the severity of the circumstances; and (6) other necessary measures.

Who will be enforcing the UEL system?

The UEL regulations provide that the state will establish a “working mechanism” (UEL office) composed of relevant central departments to take charge of the organisation and implementation of the UEL system. The UEL office is organised by MOFCOM, and it is expected that the ministry will work together with other ministries and administrations, such as the Ministry of Foreign Affairs and the Ministry of Public Security, to implement the UEL system.

What procedures will be followed?

The UEL office will announce the entities to be included in the UEL, and will decide whether an investigation is warranted prior to such an announcement. If an investigation is launched, the relevant foreign entity has the right to submit a presentation and defence. In the UEL announcement, the UEL office may impose a grace period for a foreign entity to take rectification measures.

The restrictive measures will be suspended during the grace period, and the relevant foreign entity will only be subject to the restrictive measures if it fails to rectify within the stipulated time period. If rectification measures have been properly taken and relevant negative impact has been eliminated, the relevant foreign entity can be removed from the UEL.

Are there any exemptions?

Under the UEL regulations, Chinese parties intending to import from, or export to, a foreign person on the UEL may apply to the UEL office for special permission to deal with the foreign person. Such permission will be granted only under special circumstances, on a case by case basis.

The issuance of the UEL regulations is an important milestone towards the actual implementation of the UEL system in China, which was first announced by MOFCOM in May 2019. However, it remains unclear how the UEL regulations will be implemented in practice. In particular, it is not clear as to whether, and how, the UEL regulations will apply to the existing Chinese subsidiaries of the foreign persons. Since the central government has been making great efforts in promoting foreign investment, as reiterated in a press release in connection with the issuance of the UEL regulations, most of the existing foreign-invested companies should not be adversely affected by the UEL regulations. Separately, to what extent the UEL regulations could have a “blocking” effect, with respect to the sanctions and export controls imposed by foreign countries against Chinese companies and individuals, remains to be seen.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at danian.zhang@bakermckenzie.com