China Promulgates its “Blocking” Mechanism: the “Unreliable Entity List”
On 19 September 2020, China issued its long-awaited rules (Rules) to establish its Unreliable Entity List (List) regime, which comes into effect immediately. The plan to create the List was first made public some 15 months ago, but details had been scarce until now.
The List is considered to be a countermeasure against US restrictions on various Chinese companies and their products, including Huawei, and most recently, TikTok and WeChat. The Rules establish a framework on how the List regime works, under which blacklisted companies or individuals can be restricted or even banned entirely from trading with China. At present, China has not identified particular foreign companies to be put on the List although this may be only a matter of time in the current geopolitical climate.
In practice, the List may operate as a Chinese version of a “blocking statute” against other governments’ sanctions, export controls or other actions which are considered by China to be hostile against China, Chinese companies or Chinese individuals.
1. Who can be added to the List?
Any foreign entity or individual engaging in the following actions, in the context of “international economic, trade and other relevant activities”, can be added to the List:
- endangering “national sovereignty, security or development interests of China”; or
- suspending “normal transactions” with or taking “discriminatory measures” against a Chinese entity or individual, which violates “normal market transaction principles” and causes “serious damage to the legitimate rights and interests” of the Chinese entity or individual.
In deciding whether to add a party to the List, the following factors will be considered in totality:
- 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 or individuals;
- whether the activities are in compliance with “internationally accepted economic and trade rules”; and
- other factors the authority considers appropriate.
Some key terms, such as “normal market transaction principles”, are not defined in the Rules nor have they been used in previous Chinese laws. There will be limited clarity around the precise scope of the above terms until China issues further guidance or illustrates the intended meaning of these terms through enforcement action.
On the face of it, the List regime seems to target only foreign parties, and it remains to be seen if Chinese subsidiaries of foreign corporations can be put on the List or otherwise restricted because of their affiliation with a listed foreign party.
2. Which authority will administer the List?
China will establish a “working mechanism” composed of relevant departments of the central government to implement the regime (the Working Mechanism). The office of the Working Mechanism will be established under the Ministry of Commerce (MOFCOM), indicating MOFCOM’s leading role in administering the List. China has yet to announce what other departments will be part of the Working Mechanism, but it is expected also to include at least the Ministry of Foreign Affairs, Ministry of Defence, and Ministry of Public Security.
3. What procedures will the authority follow to add a party to the List?
Before adding a foreign party to the List, an investigation may be initiated either ex officio or based on complaints or suggestions from relevant parties. The Rules do not specify who may submit a complaint or suggest an investigation. Whilst government agencies can be expected to rely on their usual channels to register complaints, the extent to which individual Chinese companies or individuals may lodge complaints relying on the Rules remains to be seen.
Public announcements will be made if an investigation is launched. The foreign party being investigated is entitled to submit its defence. The authority may, depending on developments after the investigation is commenced, either suspend or terminate the investigation or put a foreign party on the List.
The Working Mechanism seems to have limited investigative powers under the Rules. These include “making inquiries of the relevant individuals”, “inspecting and copying the relevant documents and materials”, and “taking other necessary measures”. It should be noted, however, that the catch-all authorisation to “tak[e] other necessary measures” could be interpreted broadly, and the members of the Working Mechanism may still be able to exercise their respective and extensive investigation powers provided under other applicable laws and regulations, such as the Foreign Trade Law and the National Security Law, including detention and arrest.
It is noteworthy that a foreign party may also be put on the List without formal investigation, if the authority finds there to be sufficiently clear facts that meet the criteria set out above. In such circumstances, the decision to include the foreign party on the List will still be announced.
4. What are the consequences of being put on the List?
Public announcements will be made if the Working Mechanism decides to add a foreign party to the List.
The public announcement adding a foreign party to the List will also set out an alert on the risk of conducting transactions with the foreign party. This by itself will likely affect business partners’ willingness to transact with the listed foreign party.
The Working Mechanism also has the discretion to take one or several of the following measures against a foreign party on the List:
- restricting or prohibiting the foreign party from engaging in China-related import or export activities;
- restricting or prohibiting the foreign party from investing in China;
- restricting or prohibiting the foreign party (or its relevant personnel or vehicles) from entering China;
- restricting or revoking the foreign party’s (or its relevant personnel’s) visa, work permit, or right to stay or live in China;
- imposing a fine; and
- “other necessary measures”.
The possible restrictive measures are very broad and range from sanctions, export controls, foreign investment review, to border/visa control. These measures will be implemented by MOFCOM and other government agencies based on their respective scope of authorities and in accordance with applicable laws. The Rules further require “other relevant entities and individuals” to cooperate with implementation of these measures, which potentially include any Chinese and non-Chinese companies and individuals that are subject to the Chinese authorities’ jurisdiction.
Noticeably, the announcement may also specify a time limit for the foreign party to rectify its wrongful actions; and if so, the restrictive measures will be implemented only upon expiry of the time limit, if the foreign party fails to rectify.
5. Is there a licensing regime?
The Rules provide a licensing regime, which allows affected parties to apply for a license to continue to transact with a blacklisted party. The licensing regime seems only to apply to import/export activities. The Rules also suggest that such a license will be issued only “under exceptional circumstances where transaction with a foreign entity is necessary”, but the Rules provide no further details on the licensing application and review procedures.
6. How can a party be removed from the List?
The Working Mechanism can remove a foreign party on its own volition or upon the listed party’s application by taking into account “actual circumstances”. If a foreign party demonstrates that it has rectified its activities and eliminated the consequences of its actions within the time limit specified in the public announcement, the Working Mechanism should remove the foreign party from the List.
7. How will the List affect companies operating globally?
The List regime is one of a few steps that China has taken recently to respond to the US’ escalating sanctions and export control measures. For example, China has (1) tightened its restrictions on the export of China-originated technology (relevant to any sale of TikTok’s technology), (2) continued working on its draft Export Control Law with a view to establishing a more comprehensive export control regime shortly; and (3) announced “equivalent sanctions” against a number of US politicians and organisations as countermeasures to US sanctions relating to Hong Kong and Xinjiang.
The List regime, as announced, is couched in foreign entity and foreign country-neutral terms. On paper, its potential scope of application is very broad, but it remains to be seen how it will be interpreted, and how many foreign entities are included on the List. The List regime also appears to have exterritorial reach as the references to targeted activities and foreign parties are not qualified by requiring a territorial link to China.
The List regime is not unique to China. Other countries, notably the US, have similar measures in place which are aimed at protecting a country’s national security and interests. In this regard, the adoption of the List regime can be seen as part of a broader global trend of tightening export controls, sanctions and foreign investment controls on national security and/or public interest grounds.
Companies that are operating globally and subject to the jurisdiction of both the US and China should closely monitor how China implements its List regime, and take precautionary measures to the extent possible to avoid being caught in the middle of conflicting laws. Such precautionary measures could include:
- conducting a general assessment of the potential impact of the List on measures taken to comply with US sanctions, export controls and other restrictive measures against China (including Hong Kong), Chinese companies or Chinese individuals;
- reviewing whether adequate contractual provisions are in place to protect the company's position in the event that the company or any of its major suppliers, customers or partners are put on a restricted list by either the US or China;
- reviewing whether the business can continue as is, or whether pre-emptive steps should be taken now (for example, to diversify key suppliers), under the background of continuing developments in US and Chinese laws in this area; and
- assessing and properly recording justifiable business reasons for decisions that may be perceived as being sensitive under the List, such as declining, limiting or terminating dealings with Chinese parties, and being alive to the potential legal, political and reputational risks of doing so under all applicable laws.
 An English version of the Rules published by MOFCOM is available here, for reference purposes only.