2020/09/21

China Announces Provisions on the Unreliable Entity List

By:肖瑾 刘成 李政浩

On September 19, 2020, China’s Ministry of Commerce (MOFCOM) issued the Provisions on the Unreliable Entity List (Provisions), which immediately came into effect.  More than 15 months after the concept was firstly revealed by MOFCOM in mid-2019, the Unreliable Entity List (UEL) regime is now enacted to capture foreign entities that damage fundamental interests of China or Chinese enterprises, organizations or individuals. 

Who will be subject to the UEL?

The UEL is designed to capture “foreign entities”, a term referring to enterprises, other organizations or individuals of a foreign country, which have taken actions in international economic, trade and other relevant activities that:

  • Endanger China's national sovereignty, security and development interest; 

  • Suspend normal transactions with or apply discriminatory measures against Chinese entities (enterprises, other organizations, or individuals) in violation of normal market transaction principles and cause serious damage to the Chinese entities. 

The Provisions further provide for a non-exclusive list of factors to be considered in determining whether a foreign entity should be included in the UEL, which include:
  • The degree of danger to national sovereignty, security or development interests of China;

  • The degree of damage to the legitimate rights and interests of Chinese entities; 

  • Whether its actions comply with internationally accepted economic and trade rules.

It appears from the criteria and factors enumerated in the Provisions that, in the near term, foreign companies who comply with U.S. sanctions and suspend transactions with Chinese companies may be an immediate target.

Which Chinese agencies will administer the UEL? 

The Provisions creates a “working mechanism” composed of relevant central government agencies (the composition is not specified) and dedicated to the administration of the UEL regime (Working Mechanism). The general office of the working mechanism is deployed at MOFCOM, which will lead the implementation of the Provisions.

What are the procedures to include foreign entities in the UEL? 

The Working Mechanism may initiate, either ex officio or based on suggestions and reports from relevant parties, an investigation into conducts of a foreign entity (such as inquiring relevant personnel and reviewing documents).  During the investigation, the foreign entity will have opportunities to state and defend its case. When the investigation is concluded, the Working Mechanism will make a decision whether or not the entity should be included in the UEL, based on the relevant factors mentioned above. The initiation of an investigation and the decision made will be publicly announced.

For cases with clear facts, the Working Mechanism may make a decision directly without initiating any investigation, but the decision to include the entity shall also be published.  But the Provisions do not provide more clarifications on what would be considered as “clear facts”.  

What are the consequences of being included in the UEL?

If a foreign entity is included in the UEL, the public decision will alert the risks of conducting transactions with such entity, and may (or may not) specify a time limit (grace period) for the foreign entity to rectify its actions.  Furthermore, the Provisions provide the Working Mechanism with a non-exclusive list of policy tools:

  • Restricting or prohibiting the foreign entity from engaging in China-related import or export activities;

  • Restricting or prohibiting the foreign entity from investing in China;

  • Restricting or prohibiting the foreign entity’s relevant personnel or means of transportation from entering into China;

  • Restricting or revoking the relevant personnel’s work permit, status of stay or residence in China;

  • Imposing a fine in an amount commeasurable to the severity of the conducts.

One or more of the above measures may be imposed on the foreign entity included in the UEL.  If a “grace period” is allowed for the entity, measures will only be imposed if and when the entity fails to rectify by the end of the period.

What remedies are available to entities included in the UEL?

The Provisions do not stipulate whether a decision by the Working Mechanism to include a foreign entity in the UEL can be appealed or not.  However, the Provisions provide for two types of remedies: exemption of transactions and removal of entities.

Exemption of transactions

Where it is indeed necessary for a Chinese entity to conduct transactions with a foreign entity on the UEL, the Chinese entity may apply for exemption with the office of the Working Mechanism at MOFCOM. Upon approval, the Chinese entity may conduct the transactions with the foreign entity.

Removal of entities

If an entity on the UEL rectifies its actions within the time limit and eliminate the consequences of its actions, the Working Mechanism shall decide to remove the entity from the UEL. A foreign entity on the UEL may apply for removal, subject to the Working Mechanism’s decision. Moreover, the Working Mechanism may decide on its own whether to remove certain entities. Any removal decision shall be publicly announced, and measures imposed on the removed entities shall immediately cease.

What could be the wider implications of the Provisions?

On the day following the release of the Provisions, the person in charge of MOFCOM’s department of treaty and law answered questions from media reporters regarding the Provisions.   The person in charge emphasized that the release of the Provisions by no means change China’s position in safeguarding multilateralism, in deepening reform and widening open-up, and in protecting market participants’ legitimate interests.  The person in charge further stated that the UEL does not have any preset timetable or entity candidates.

The Provisions were released amid growing tensions in the U.S.-China bi-lateral relations. Notably, the U.S. Department of Commerce just recently announced new bans on apps with expanding popularity and influence from China to the globe.  The timing of the release of the Provisions fuels speculation that China may use the UEL for tit-for-tat retaliation on foreign entities deemed in violation of the Provisions.  In this regard, the person in charge commented that the release of the Provisions is routine rule making by the Chinese government, and the Provisions do not target any specific country or entity. 

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