On 19 September 2020, the Ministry of Commerce issued the Provisions on the Unreliable Entity List (the “Provisions”). The Provisions establish a legal framework that provide initial procedures for the designation of non-Chinese enterprises, other organizations, or individuals of a foreign country (“foreign entity”) that act contrary to China’s interests.
Purpose of the Provisions
While the Provisions might be viewed in a negative light and could reflect further control for foreign entities in China, their purpose is to deter foreign entities from objectionable conduct. In full, “for the purpose of safeguarding national sovereignty, security and development interests, maintaining fair and free international economic and trade order, protecting the legitimate rights and interests of enterprises, other organizations, and individuals of China”. In sum, the Provisions sustain and protect the market, as well as ensure entities adhere to the Law.
Actions foreign entities can take as a precaution
For foreign entities in China, an internal compliance review (“ICR”) should be conducted to ensure any risk of being placed on the Unreliable Entity List (“UEL”) are mitigated. Particularly, foreign entities should ensure in their ICR, that actions conducted in relation to international economic, trade and other relevant activities do not involve:
- Endangerment of national sovereignty, security or development interests of China.
- Suspension of normal transactions with an enterprise, other organization, or individual of China or apply 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.
Foreign entities suspected of engaging in objectionable conduct can find themselves under investigation
According to the order establishing the UEL, an office for an interdepartmental working mechanism will be established at the Ministry of Commerce. The working mechanism will serve to organise and implement the UEL. What’s more, it will decide, based on information obtained by the Chinese government, whether to investigate actions taken by a foreign entity. During the investigation phase, the mechanism is empowered to ask questions and consult relevant documentation. At this stage, a targeted foreign entity may argue that its alleged activities do not fit the criteria for being placed on the UEL.
As a precaution against an investigation, foreign companies should fully ensure company records, documents and accountancy are regularly updated and organised properly.
Where a foreign entity is placed on the UEL, an announcement shall be made. Such announcement may include an alert about the risks of conducting transactions with such foreign entity.
Penalties for foreign entities placed on the UEL
A foreign entity placed on the UEL may be subject to one or several of the following measures based on the actual circumstances. Such measures are determined by the working mechanism and shall be announced.
- Restricted or prohibited from engaging in China-related import or export activities
- Restricted or prohibited from investing in China
- Restricted or prohibited relevant personnel or means of transportation from entering into China
- Restricted or revoked relevant personnel’s work permit, status of stay or residence in China
- Incur a fine whose corresponding amount is in accordance with the severity of the circumstances
- Other necessary measures
Once the working mechanism decides to add a foreign entity to the UEL, it may specify a time limit for the foreign entity to “rectify its actions” before pursuing specific restrictive measures. Foreign entities on the UEL may also formally apply for removal via the working mechanism.
While the Provisions could be interpreted as economic sanctions for foreign entities, the UEL signifies tougher measures for foreign companies who run afoul of the Foreign Trade Law of the People’s Republic of China, the National Security Law of the People’s Republic of China and other relevant laws. What’s more, as foreign investment enters a new era with the Foreign Investment Law of the People’s Republic of China (“FIL”), effective from 1 January 2020, regulation has been strengthened to safeguard foreign investment for all parties.
If you would like more information about the Unreliable Entity List (UEL), internal compliance review or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.
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