On April 28, 2021, the Ministry of Commerce issued the “Guiding Opinions of the Ministry of Commerce on the Establishment of Internal Compliance Mechanisms for Export Control by Exporters of Dual-use Items" (Announcement No.10 [2021] of the Ministry of Commerce , hereinafter referred to as the “Guiding Opinions"), which became effective on the date of issuance. The Guiding Opinions and the attached “ Internal Compliance Guidelines for Export Control of Dual-Use Items" (hereinafter referred to as the “Chinese Guidelines") have somewhat filled the gaps left by the Chinese Export Control Law and provide specific guidance for exporters on how to establish internal compliance programs. This will undoubtedly assist exporters in guarding against the regulatory risks that they may face under the Chinese laws, which will help enterprise win the trust of their business partners and stabilize and expand international cooperation.

Currently, the United States, the European Union, the United Kingdom, and other major countries (regions) have issued guidelines for domestic enterprises to establish and improve export management and compliance program. For example, the Bureau of Industry and Security of the United States (“BIS") has issued the “How to Develop an Effective Export Management and Compliance Program" (“EMCP") [1]. The Guiding Opinion uses the experience of international practice.

First, it is not difficult to find that the framework of the Chinese Guidelines is basically consistent with that of the U.S. EMCP after comparison.

Furthermore, it can be seen that similar to the U.S. Export Administration Regulations (“EAR"), the Chinese Guidelines specifies the “4Ws" review requirements in the element of the “Establishing Examination Procedures". That is, exporters are required to conduct a comprehensive assessment of the item (what), end-user (who), end-use (why), destination (where), etc. Chinese Guidelines also provides a list of "red flags" to illustrate some warning abnormal behaviors. It is not difficult to find the list of “Red Flags" issued by the Ministry of Commerce is basically the same as that provided by BIS[2]. In addition, the general guidelines of principles for other elements provided by the Chinese Guidelines, such as the files to be retained and retention period, are also very similar to the EMCP requirements recommended by BIS. In summary, except the additional element of “Establishing an Organization Structure", the basic requirements of the other eight elements of the Chinese Guidelines are essentially the same as those of the EMCP.

Due to the same compliance logic, for enterprises that have already established EMCP under the U.S. law, they may consider integrating the relevant requirements of Chinese Export Control Law and the nine basic elements specified in the Chinese Guidelines into their existing EMCP. However, during the EMCP localization process, enterprises need to pay special attention to the differences in compliance practices caused by the different export control requirements between U.S. and China.

The Chinese Guidelines specifies that it mainly applies to exporters of “dual-use" items. According to the “Catalogue of Dual-use Items and Technologies Subject to the Administration of Import and Export Licenses", the scope of dual-use items covers monitoring chemicals, commercial encryption products, nuclear, nuclear dual-use items, biological dual-use items or other related chemical products, missile-related items, precursor chemicals, radioisotopes, some dual-use items, and special civilian items.[3] In addition, according to the miscellaneous provision of the “Measures for the Administration on Import and Export License for Dual-Use Items and Technologies", where the exporter knows or should know or receives notices from relevant administrative authorities of the State Council that his/her items and technologies to be exported have the risk of being used in weapons of mass destruction and their related means of delivery, an export license shall be applied for towards the items and technologies concerned, whether included in the Controlling List or not, and an export license for dual-use items and technologies shall be handled in accordance with these Measures. [4]

The “dual-use" items are only part of the controlled items under Chinese Export Control Law. According to Chinese Export Control Law, which came into effect on December 1, 2020, China implements list management on export controlled items, including control lists issued by the state export control authorities and temporary control on items not included in the control lists as needed. The law also specifies that “the controlled items" includes technical materials and other data related to the items". In addition to the list management and temporary list management, the controlled items also includes the circumstances that if exporters knows or should know or are notified by the export control administrative departments of the state that the relevant goods, technologies or services may (1) compromise the national security and interest; (2) be applied to design, develop, produce or use weapons of mass destruction and their means of delivery; (3) be used for terrorist purposes. [5] Although the controlled lists under the Chinese Export Control Law has not yet been clarified, Chinese current catalogues of controlled items also include “Management List of Military Exports", “Catalogue of Technologies Prohibited or Restricted from Export", etc.[6]

It can be seen that the scope of controlled items in China is much larger than that of the “dual-use" items. Considering the increasingly intensive trade frictions and technological competition, there is a possibility of expanding the application scope of the Chinese Guidelines in the future. Exporters can take precautions and make early preparation according to the sensitivity of their exports.

The Catalogue of Dual-use Items and Technologies Subject to the Administration of Import and Export Licenses adopts the management mode of “commodity description" and “HS code". In addition, as mentioned above, “Measures for the Administration on Import and Export License for Dual-Use Items and Technologies" also set up “know, should know or be notified" clause as miscellaneous provision. It can be seen that these provisions focus on the management from the perspective of “What", but for the “Why" perspective, only passive “know, should know or be notified" instead of taking the initiative to eliminate risks is required.

However, as mentioned above, according to the Chinese Guidelines, exporters are required to make a comprehensive assessment on items, end-users, end-use, destination, etc. On the one hand, it is necessary to determine whether the relevant items can be traded with customers; on the other hand, it is also important to further conduct due diligence and pay attention to whether the customer has some warning abnormal behaviors. The key points of compliance review mainly include: whether the items involved in the transactions are included in the state export control list; whether the country where the end user is located is subject to UN sanctions or among other sensitive countries; whether there is a risk in the end-user or end-use; whether the end-use is reasonable, etc. These review points are close to the 4W review requirements recommended by EAR: item (What) + destination (Where) + end-user (Who) + end-use (Why). Moreover, same as EAR, the Chinese Guidelines also specifies that the compliance checks are required to cover the whole process of the transaction, including pre-contract review stage, contract signing stage, license application stage, and contract performance stage. For each stage, the Chinese Guidelines lists the corresponding risk concerns in detail.

In other words, the Chinese Guidelines puts forward higher and more detailed requirements for enterprise compliance than the current law on dual-use items. Thus, is it necessary to establish such a high standard of compliance system? From the perspective of excluding “subjective fault" to exempt from penalty[7], we suggest that the internal compliance management system of corresponding enterprises should meet the requirements of the Chinese Guidelines to the maximum extent. For example, the fulfilment of the obligation to prevent exports from compromising national security requires the buyer’s commitment and even due diligence, and if necessary, the Ministry of Commerce or the advice of “external professional agencies" (including law firms) can also be consulted.

Chinese Export Control Law introduces the concept of “deemed export", stipulating that “the provision of controlled items by a citizen, legal person, or unincorporated organization of the People's Republic of China to a foreign organization or individual" are subject to Chinese export control. The Chinese Guidelines also lists the circumstances that may be related to the concept of “deemed export": (1) employing foreign employees to perform work related to controlled technology, and (2) publishing information on controlled technology at trade shows. Due to the restricted number of examples, it is not clear whether to make high-standard compliance requirements in compliance practice according to the BIS interpretation, such as reviewing the identity of all visitors to the company in advance.

The Chinese Guidelines fails to address some issues of the “re-export", such as whether foreign products containing Chinese controlled items and direct products produced by using Chinese technology should be regulated as controlled items under Chinese Export Control Law. Furthermore, there are some theoretical and practical difficulties in implementing long-arm jurisdiction in China. These differences are reflected in the situation that when localizing EMCP, different enterprises are allowed to develop the appropriate scale of compliance program specifically tailored to the sensitivity of the exported items as well as the company’s own resources and capabilities.

The “lists" need to be considered are relatively scattered and involve different objectives, including (1) the unreliable entity list; (2) the control list; (3) the list of terrorist organizations and terrorists announced by the Ministry of Public Security, and (4) the sanctioned parties announced by the Ministry of Foreign Affairs. Moreover, prior to the official release of the unreliable entity list and the control list, the sanctioned parties are mainly announced through a press conference held by the Ministry of Foreign Affairs. In addition, according to some sanction announcements[8], sanctioned individuals and their affiliated companies and institutions are restricted from dealing with and transacting with Chinese entities, but the affiliated companies and institutions are difficult to query, which makes it difficult for exporters to screen the parties prohibited or restricted from transaction. Exporters may strive for compliance through meeting other management requirements.

To sum up, in view of the unstable international environment and the increasing uncertainties, we suggest that exporters shall establish and improve the internal compliance system for export control as soon as possible by referring to the Chinese Guidelines, and may employ professional institutions such as law firms to assist and audit. In addition, exporters shall continue to pay attention to the latest legislative developments in the field of export control, updates on control lists, unreliable entity list, etc., which may be published and modified at any time, and constantly improve the internal export control compliance program accordingly, so as to avoid that the localized EMCP is not applicable in China.