On October 19, 2024, China formally published the new Regulations on Export Control of Dual-Use Items (“Regulations”), which will take effect on December 1, 2024. These Regulations which are aimed at implementing the dual-use export controls under the Export Control Law (“ECL”) introduced in 2020, will replace the existing two-decade-old legacy regulations on dual-use export controls. Compared to the legacy regulations, these new Regulations are more closely aligned with the ECL framework and contain implementation details not available in the ECL itself.
We highlight below the key notable changes brought by the Regulations, as well as our suggestion on the immediate actions to address these changes:
- Unifying export control regimes under the ECL framework. While the title to the Regulations refers to “dual-use items” only, the scope of control under the Regulations extends beyond the items listed on China’s dual-use control lists to include items subject to the ECL’s “catch-all” provision (further discussed below). Additionally, Article 47 of the Regulations suggests a potential expansion of the scope of the ECL to cover items other than military and dual-use items. It will be interesting to see how existing export controls over non-dual-use technologies (e.g., AI-related technologies), currently regulated under a separate legal framework, will interact with the ECL.
- Strengthening the enforcement of military end-use control. The ECL’s catch-all control restricts the export of items not listed on the dual-use control lists but intended to be used for certain prohibited end-uses, including those that could threaten China’s “national security and interests”, which is broadly interpreted to include use in foreign military activities that could threaten China’s sovereignty and interests. The Regulations expand the control by stipulating that:
- MOFCOM can notify port customs authorities to detain outbound shipments suspected of involving items subject to catch-all control, consistent with recent practices observed.
- Exporters must report to MOFCOM as soon as they become aware of any export activities that involve items subject to “catch-all” control, any change in the end-use or end-user of items, or any falsified end-use or end-user certificate. This reporting obligation has no time limit and can apply to past shipments. Non-compliance may result in severe penalties similar to those for unauthorized exports.
- Re-export controls. MOFCOM may, at its discretion, decide that certain items transferred or supplied by foreign entities or individuals outside of China to specified countries, entities and/or individuals, shall be subject to all or part of the restrictions imposed by the Regulations, as if the items were exported directly from China. Such restrictions can apply if the items are:
- dual-use items manufactured abroad that contain, integrate, or are blended with specific dual-use items originating from China;
- dual-use items manufactured abroad using specific technologies originating from China; or
- specific dual-use items originating from China.
This jurisdictional framework for extraterritorially application of the export controls, is similar to the re-export control framework under the Export Administration Regulations (“EAR”) of the United States. However, the re-export controls described here will only become effective, after MOFCOM issues specific instructions on key factors to determine its scope of application, such as the specified destination(s), de minimis threshold(s), and scope of China-origin technologies, etc., targeted under this measure.
- Chinese equivalent of the “Unverified List”. If an importer or end-user fails to cooperate in an end-use and end-user verification or fails to provide the required information for verification purposes, MOFCOM may place them on a watchlist (“Watchlist”), similar to the “Unverified List” under the US EAR. A general license or simplified authorization for export of dual-use items to entities listed on the Watchlist will not be available. An ordinary license application for such exports will require additional risk assessment and compliance undertakings, with no set timeline for approval.
- Alignment between export control and sanctions regimes. The Regulations provide additional the implementation details for listing foreign importers and end-users on a control list, which is largely similar to the Entity List under the US EAR (“Control List”). This suggests that China may start implementing a new “blacklist” as a geopolitical retaliatory tool, in addition to the Unreliable Entities List (“UEL”) and the sanctions list under the Anti-foreign Sanctions Law (“AFSL”). The scope for this Control List designation under the Regulations is consistent with the ECL, covering among others, entities which threaten China’s national security and interests. Additionally, the Regulations stipulate that any person subject to transaction bans under the relevant sanctions measures imposed by relevant state authorities (e.g., the UEL and AFSL sanctions regimes) will automatically be subject to all the restrictions applied to Control List entities. This indicates alignment between China’s export control and sanctions regimes.
- Country-based controls. The Regulations reinforce the ECL provision that allows MOFCOM to vary its export controls based on countries of destination. The Regulations further clarify that the bases for differentiating the controls among countries, include national security and interests related concerns, fulfilment of non-proliferation or other international obligations, compliance with international treaties or agreements concluded or acceded to by China, and adherence to relevant United Nations Security Council resolutions.
- Reporting obligations of third-party service providers and financial institutions. Apart from the obligations imposed by the ECL on third-party service providers to not provide agency, freight, mailing, customs declaration, third-party e-commerce transaction platform, financial or other services in furtherance of activities in violation of export controls, the Regulations further require service providers who discover any suspected export control violation relating to transactions facilitated to promptly report the matter to MOFCOM. The reporting obligation imposed on third parties, including financial institutions, mirrors the US law. Failure to comply with the reporting obligation can attract fine up to CNY 500,000.
- Restriction on collaborating with foreign export control authorities. Under the Regulations, Chinese persons and entities are not allowed to accept any visits, on-site inspections or other requests relating to export control compliance from any foreign government unless prior approval of MOFCOM has been obtained. A violation can attract fine up to CNY 3 million and potential suspension of business activities.
- One-time and general license. The Regulations also clarify that an exporter can opt to apply for either (i) a one-time export license for specific transaction, (ii) a general license which can be used for multiple exports falling within the scope of the license during its validity period (up to three years), or (iii) a simplified authorization, which grants automatic approval for items exported temporarily and reimported under an applicable customs program. The general license regime is different from the “general approval” regime under the previous regulations, which provided approval-in-principle but still required a license application to be submitted for each shipment. Eligibility for a general license should be based on, among other conditions, the exporter’s compliance track record and the robustness of its internal compliance program implementation.
- Dual-use control lists. The Regulations do not address the dual-use control lists. As announced by MOFCOM, these lists will be revamped using a coding system similar to that under the Wassenaar Arrangement. As the legacy regulations on dual-use export controls will be repealed effective December 1, 2024 and the new control list is expected to be published before this date.
Conclusion
The new Regulations introduce various requirements which will impact companies involved in export operations in China. It is, therefore, critical for companies doing business in and with China to understand and prepare for the implementation and compliance with these requirements. The immediate actions that need to be taken may include:
- Reviewing export classification methodologies and procedures to align with the new coding system and approaches.
- Assessing the risk of exports becoming subject to the catch-all provision, particularly with respect to goods intended for military end-use, and developing strategies for addressing potential reporting obligations.
- Mapping global supply chain to identify products involving China-origin inputs and technologies to prepare for the potential extraterritorial application of the Chinese export controls.
- Developing a China-specific sanctions compliance program that takes into account all the Chinese “blacklists”, including the Control list and Watchlist, and holistically addresses the different, and sometimes conflicting, sanctions compliance obligations for Chinese and non-Chinese entities within the same multinational corporate group.
- Establishing an internal export compliance program in line with the guidance provided by MOFCOM to avail exporting companies to certain benefits, including eligibility for general license.
Frank Pan is a partner of FenXun Partners who is a premier Chinese law firm. FenXun established a Joint Operation Office with Baker McKenzie in China as Baker McKenzie FenXun which was approved by the Shanghai Justice Bureau in 2015.
