China Issues New Regulations on Export Control of Dual-Use Items

On 19 October 2024, the State Council of the People’s Republic of China (“PRC”) announced the Regulations on Export Control of Dual-Use Items (“Regulations”). The Regulations will take effect on 1 December 2024, four years after the entry into force of the PRC Export Control Law (“Export Control Law”). They aim at consolidating the existing fragmented export control regulations on dual-use items and establishing an integrated regulatory framework for this topic.

The Regulations, consisting of 50 articles, are divided into six chapters – general provisions, control policies, control lists and measures, supervision and management, legal liabilities, and supplementary provisions. The Regulations extend and detail the foundation laid by the Export Control Law. They also introduce several new rules.

This newsletter provides a summary of the new stipulations and some noteworthy aspects of the Regulations compared to the existing Export Contract Law. Our previous newsletter on the Export Control Law can be found for your reference under: China Enacts First Export Control Law.

1.      Dual-use Items

Under the Regulations “Dual-use Items” are defined as items that can be used for both, civilian and military purposes, or that can contribute to enhancing military potential, particularly goods, technologies, and services that can be used in the design, development, production, or use of weapons of mass destruction and their means of delivery, including relevant technical materials and other data. The Export Control Law defines Dual-use Items in the same way in the context of defining “Controlled Items” which include not only Dual-use Items, but also military products, nuclear materials and other goods, technologies, services and items that are related to the protection of national security and interests or the fulfillment of non-proliferation or other international obligations. Therefore, according to the legislative hierarchy, stipulations under the Export Control Law for Controlled Items shall generally apply for Dual-use Items while specific stipulations under the Regulations shall prevail, provided that they do not conflict with the Export Control Law.

2.      Lists Related to Export Control of Dual-use Items

a)     Consolidated Control List of Dual-use Items

China’s export control of Dual-use Items began in the 1990s. After years of efforts, a basic export control system covering Dual-use Items has already been established, however, it is scattered in the respective regulations, measures and dual-use items export control lists and catalogues which separately deal with export control of specific Dual-use Items such as dual-use nuclear items, dual-use biological agents, chemicals and missiles and related items. According to the Regulations, such regulations and provisions will be cancelled upon effectiveness of the Regulations. The respective dual-use item export control lists and catalogues will be consolidated by the Ministry of Commerce (“MOFCOM”) and will be implemented also on 1 December 2024 (“Control List”) according to the official information of the MOFCOM (司法部、商务部负责人就《中华人民共和国两用物项出口管制条例》答记者问).

b)     List of Entities under Export Control

According to the Export Control Law, foreign importers and end users are subject to a list of entities under export control (“List of Entities under Export Control”), if they (i) breach the regulatory requirements regarding end users or end uses of Controlled Items under the Export Control Law, (ii) pose a potential endangerment to national security and interests of the PRC, or (iii) use any Controlled Items for terrorist purposes.

The Regulations have now expanded the scope of the List of Entities under Export Control as stipulated in the Export Control Law to stipulate that foreign importers and end users shall be included in the List of Entities under Export Control in either of the following additional circumstances which harm the national security and interests:

·      Using Dual-use Items in the design, development, production, or use of weapons of mass destruction and their means of delivery; or

·      Being subject to measures such as prohibitions or restrictions on relevant transactions or cooperation imposed by relevant State authorities.

c)      New Watch List

The Regulations newly introduce a Watch List as a precaution before foreign importers or end users are included in the List of Entities under Export Control. Foreign importers or end users who fail to comply with the MOFCOM’s verification procedures for end users and end purpose of Dual-use Items within a prescribed time limit, resulting in the MOFCOM’s inability to verify end users and/ or end purpose, may be placed on the Watch List by MOFCOM. The Watch List increases the difficulty for the listed entities to obtain export licenses. For example, no facilitative measures shall be granted such as obtaining an export license by applying for a general export license or an export credential (see details below).

The Watch List serves as an intermediary measure similar to the Unverified List under the U.S. Export Administration Regulations. Entities on the Watch List may be removed, if they cooperate and verification outcomes are satisfactory. If an entity is found to have violated provisions regarding end user and end use management, posed risks to national security and interests or has other circumstances prescribed by the Regulations, the MOFCOM may move it from the Watch List to the List of Entities under Export Control accordingly.

d)     Evaluation of Temporary Control

The Export Control Law stipulates a temporary control mechanism on items outside the Control List for up to two years due to national security and interests or fulfilling non-proliferation obligations and other international obligations. Before the temporary control expires, it shall be evaluated as to whether it shall be lifted, extended or the concerned item shall be included in the Control List. The Regulations re-iterate such temporary control mechanism, however, specify that extension of the temporary control shall be limited to 2 times at the maximum.

3.      Export License and Facilitative Measures

a)     Registration of Exporters Cancelled

Under the current export control regime, exporters of certain Dual-use Items, e.g., dual-use nuclear items, shall register with MOFCOM for such business as a prerequisite and in addition to the export license requirement. Such registration requirement has now been abolished in the Regulations so that for all Dual-use Items only a respective export license or an export credential shall apply.

b)     General Export License

Apart from an ordinary single-case export license which an exporter shall apply for export of specific Dual-use Items to one single end user, the Export Control Law provides for the possibility of a “general export license” for qualified exporters without, however, stipulating more details in this regard. According to the Regulations, a general export license permits exporters to conduct multiple exports of specific Dual-use Items to one or more end users within the specified scope, the validity period and according to prescribed conditions. Exporters with a well-functioning internal compliance system for export control of Dual-use Items, relevant export records, and stable export channels and end users may apply for a general export license to the competent department of the MOFCOM.

The Regulations do not define the term “a well-functioning internal compliance system for export control of Dual-use Items”. At present, we understand that exporters which want to apply for a general export license should mainly refer to the MOFCOM’s Guidance on the Establishment of Internal Compliance Mechanisms for Export Controls to establish their internal dual-use export control compliance system.

To be noted is that exporters shall not apply for a general export license (or an export credential as below mentioned) in case, for instance and amongst others, they have been punished with criminal or administrative penalties due to violation of export control administration, or they are a wholly-owned enterprise, representative office, or branch established with the PRC by foreign entities or individuals on the List of Entities under Export Control.

c)      Export Credentials

The Regulations have further introduced “export credentials” as a new facilitative measure. Exporters in specific scenarios, such as re-export after import for domestic repairs, export for overseas repairs before re-import, re-export after domestic exhibitions, etc., can obtain an export credential by registering and submitting certain information to the competent department of MOFCOM and declare customs clearance on their own. However, the Regulations do not specify which information shall be submitted to obtain an export credential so that implementing provisions in this regard need to be awaited.

d)     Re-Application for Export Licenses

The Regulations stipulate the scenarios and requirements for re-application for a valid export license. According to the Regulations, if an exporter holding a valid single-case export license or general export license needs to change “key elements” such as the type of Dual-use Items, destination, end-user, or end-use, it shall file a new application for a corresponding new export license. For other changes that are not key elements, only a change application is required.

Similarly, if any element of an export based on an export credential changes, the concerned exporter shall re-submit the required information to obtain a new export credential or, accordingly, apply for a single-case export license or a general export license.

PRC law imposes serious legal consequences in case of illegal use of an export license despite changed circumstances requiring a new export license. In such case MOFCOM may suspend the relevant export license and, if national security or international non-proliferation obligations are at risk, the license shall be revoked or cancelled. Export without a correct export license may result in confiscation of illegal income, fines up to 10 times the illegal turnover (in case of illegal turnover over RMB 500,000) or up to RMB 5,000,000 (in case of illegal turnover below RMB 500,000), and in more serious cases, business suspension orders up to revocation of export qualifications.

4.      Reporting Obligations

The Regulations reiterate an old MOFCOM order of 2007 that Chinese citizens, legal persons, and non-legal person organizations shall immediately report to the competent department of the MOFCOM upon receiving any foreign government’s request for visits or on-site verifications related to export control. Without consent of MOFCOM, they must not accept or undertake to accept such visits or verifications.

In addition, the Regulations provide for other reporting obligations that are required in the following cases, such as:

·      the exporter is aware that the export no longer meets the conditions for obtaining an export credential;

·      the exporter is aware that the end-user or end-use changes or their certificates are forged, or the certificates are obtained through bribery, deception, or other illegal means;

·      the exporter is aware that the export of Controlled Items may jeopardize national security and interests, contribute to weapons of mass destruction or to terrorism;

·      the exporter is aware of significant changes in the type of export, sensitivity of the concerned Controlled Items, destination country or region, end-user and end-use; and

·      the operators who provide agency, freight, courier, customs declaration, third-party e-commerce trading platforms, and financial services, etc., discover suspected violations of export control of Dual-use Items.

5.      Limited Extraterritorial Jurisdiction

The Regulations grant MOFCOM limited extraterritorial jurisdiction over the transfer or provision of the following Dual-use Items to designated destinations or entities outside the PRC by foreign organizations and individuals:

·      Dual-use Items manufactured abroad that contain, integrate, or are mixed with any specific Dual-use Items originating within the PRC;

·      Dual-use Items manufactured abroad using any specific Dual-use Items such as technologies originating within the PRC; and

·      Any specific Dual-use Items originating within the PRC.

In the above circumstances, MOFCOM may request the relevant foreign organizations or individuals to follow the provisions in the Regulations with necessary changes. This rule has similarities to the de minimis rule and the foreign direct product rule etc., established in the U.S. Export Administration Regulations. However, according to the wording of the Regulations, MOFCOM’s extraterritorial jurisdiction appears to be only applicable to certain countries, regions or organizations and/or certain foreign organizations or individuals as may be designated by MOFCOM on a case-by-case basis and only upon its request. Therefore, it remains to be seen how the extraterritorial jurisdiction of MOFCOM will be implemented in practice and, in particular, how MOFCOM will define “specific Dual-use Items” in this context because a relevant legal definition is missing in the Regulations. Up to date we are not aware of any precedents of MOFCOM exercising such extraterritorial jurisdiction.

6.      Conclusion

The Regulations define and clarify a few points that have been unclear under the Export Control Law. Therefore, the Regulations will be more efficient and practicable for implementing and enhancing export control over Dual-use Items. However, certain provisions, such as in relation to the information required for an export credential, extraterritorial jurisdiction, re-export of Dual-use Items, etc., still require explanatory or implementing provisions for clarification.

Considering such uncertainties, we recommend that operators engaged in export business of Dual-use Items from and in relation to the PRC should establish and refine their internal compliance systems as soon as possible. Export operators should also be proactive in fulfilling their reporting obligations under the Regulations as far as applicable in order to avoid unintended violation of the relevant provisions. They should conduct a thorough assessment on their export business and, if necessary, seek professional advice to effectively minimize the risk of incompliance and to ensure sustainable business practice.