On September 19, 2020, the Ministry of Commerce of China issued the Measures on Unreliable Entities List (the Measures), which came into effect on the same date. This is an important further step toward establishing a regime of unreliable entities list (UEL Regime), which was first mentioned by the spokesperson for the Ministry of Commerce at the end of May 2019. The Measures provide a legal basis for the implementation of the UEL Regime.
Below is a summary of the key points in the Measures.
What is the UEL Regime?
Under the Measures, China will establish the UEL Regime with the view of taking corresponding measures against the actions of Foreign Entities (as defined below) in international trade and related activities, which:
- Endanger the sovereignty, safety and development interests of China; and
- Discontinue normal transactions with Chinese enterprises, other organizations or individuals (Chinese Entities) in breach of normal market trading principles, or which discriminate against Chinese Entities and severely damage the legitimate interests of Chinese Entities.
“Foreign Entities” referred to in the Measures include foreign enterprises, other organizations and individuals.
Who is the regulatory authority implementing the Measures and the UEL Regime?
A working mechanism comprising relevant central governmental departments (the Working Mechanism) will be established to implement this regime. The office of the Working Mechanism will be hosted at the Ministry of Commerce. The Working Mechanism may, on its own initiative or in response to suggestions or allegations by outside parties, decide to investigate a Foreign Entity suspected of engaging in any of the activities mentioned above, and make a public announcement of such decision.
The Working Mechanism will conduct investigations by making inquiries with interested parties, reviewing or making photocopies of relevant documents and taking other necessary measures. During the period of investigation, the relevant Foreign Entity may state its grounds or defend its position. The Working Mechanism may, depending on the actual circumstances, suspend or terminate an investigation, or when the circumstances leading to the investigation suspension have changed, resume the investigation.
What factors will be considered by the Working Mechanism in making its decisions?
The Working Mechanism may determine whether or not a Foreign Entity shall be put on the “unreliable entities list” by taking into account all of the following factors:
- The degree of damage caused to China’s sovereignty, safety and development interests;
- The degree of damage caused to the legitimate interests of Chinese Entities;
- Whether or not the act under the review is in line with internationally recognized economic and trading rules; and
- Any other factors it decides to take into account.
If the Working Mechanism makes a decision that a Foreign Entity should be placed on the “unreliable entities list”, an announcement will be made to that effect and such announcement may also set out the risks of transacting with such listed Foreign Entity and, if applicable, the time limit for the Foreign Entity to make rectifications.
What are the consequences if a Foreign Entity is put on the “unreliable entities list”?
For a Foreign Entity put on the “unreliable entities list”, the Working Mechanism may determine (and such decision will be announced) to impose any one or more of the following regulatory measures, depending on the actual circumstances:
- Restricting or prohibiting it from conducting any import/export business relating to China;
- Restricting or prohibiting it from making any investment in China;
- Restricting or prohibiting any relevant individual or vehicle from entering China;
- Restricting or revoking relevant individual’s China work permit or the permit of staying or living in China;
- Imposing fines in an amount corresponding to the seriousness of the circumstances;
- Taking such other measures as are considered necessary.
The Measures provide that in case the decision of the Working Mechanism requires the Foreign Entity to make rectifications by a designated time limit, none of the above measures may be taken, which is intended to allow the Foreign Entity time to make rectifications. If however the Foreign Entity fails to rectify its actions within such period, the regulatory measures imposed as part of the Working Mechanism’s decision will be implemented.
In exceptional circumstances where a Chinese Entity has a need to transact with a Foreign Entity which has been put on the “unreliable entities list”, it shall file an application to the Working Mechanism, and may proceed with the transaction when permission is granted.
Can a Foreign Entity already put on the “unreliable entities list” be delisted?
The Working Mechanism may, in light of the actual circumstances, make a decision to remove a Foreign Entity from the “unreliable entities list”. When a Foreign Entity has rectified its actions within the designated time limit and taken actions to remedy the consequences thereof, the Working Mechanism may decide to remove it from the “unreliable entities list”. The Foreign Entity concerned may also make an application to be “delisted”, which will be considered and determined by the Working Mechanism.
The decision of removing a Foreign Entity from the “unreliable entities list” will be announced and all regulatory measures taken against such entity will cease from the announcement date.
The Measures, albeit relatively short, provide some basic parameters for the Chinese regulatory authorities to implement the UEL Regime as may be considered necessary. It is to be seen how this regime will work in practice amid the current unsettled state of China-US trade relations.