On 19 September 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) issued the Regulations on Unreliable Entity List (“UEL Regulations”), which take effect on the same date. While MOFCOM has not named any specific foreign entity to be included on the Unreliable Entity List (UEL), the UEL Regulations set out the principles for the implementation of the UEL system as summarized below.  

What entities will be included in the UEL? The UEL consists of foreign persons ( i.e., enterprises, organizations or individuals) which engage in certain activities endangering China’s national sovereignty, security or development, causing serious damage to the legitimate rights and interests of Chinese enterprises, organizations 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 (i) restrictions or prohibitions on China-related import or export activities; (ii) restrictions or prohibitions on investment in China; (iii) restrictions or prohibitions on relevant personnel or transport vehicle from entering into China; (iv) restrictions or revocation of the relevant personnel’s work permit, qualification for stay or residence in China; (v) a fine of the corresponding amount according to the severity of the circumstances; and (vi) 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 organization and implementation of the UEL system. The UEL Office is organised by MOFCOM.  It is expected that MOFCOM will work together with other ministries and administrations such as the Ministry of Foreign Affairs and the Ministry of Public Security Bureau to implement the UEL system.

What procedures will be followed? The UEL Office will announce the entities to be included in  the UEL List, and will decide whether an investigation is warranted prior to such 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.   

Any exemption? 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 such 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 would apply to the existing Chinese subsidiaries of the foreign persons. Since the Chinese government has been making great effort in promoting foreign investment as reiterated in a press release in connection with the issuance of the UEL Regulations, we believe 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 control imposed by foreign countries against Chinese companies and individuals remain to be seen.

Authors: Vivian Wu, Tracy Wut, Zhi Bao, and Jon Cowley.

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