Control and consequences

China has proposed legislation to strengthen its national export control regulations

By: Chris Gillis
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Photo: Stephen Finn / Shutterstock.com
   The Chinese government has proposed legislation that calls for strengthening its national export control regulations, including using stiff penalties against those individuals and entities who violate them.
   China’s Ministry of Commerce (MOFCOM) said the move is a priority since the country is a permanent member of the UN Security Council and a party to several international treaties that prescribe controls for the cross-border trade of nuclear weapons and their components, as well as chemical, biological and conventional weapons. The government noted that fulfilling its international obligations related to export controls will “establish a responsible image.”
   “In order to prevent the risk of proliferation of weapons of mass destruction, conventional weapons and related dual-use items and technologies on a global scale, it is necessary to speed up export control legislation,” the Ministry of Commerce said in its draft export administration law.
   For years, China has been accused by U.S. and European export control regimes of being an illicit facilitator of dual-use technologies—those which can be used for both commercial and military applications—to countries of concern, such as Iran and North Korea. These countries have repeatedly violated international treaties by seeking out western-made components to integrate within their clandestine nuclear weapons programs.

For years, China has been accused by U.S. and European export control regimes of being an illicit facilitator of dual-use technologies—those which can be used for both commercial and military applications—to countries of concern, such as Iran and North Korea.

   In addition, both the United States and European Union have alleged that Chinese entities on numerous occasions over the years have illegally imported licensable dual-use items for enriching China’s military weapons development programs.
   In March, Zhongxing Telecommunications Equipment Corp. and ZTE Kangxun Telecommunications Ltd., China’s second largest telecommunications manufacturer, were assessed a $1.2 billion penalty by the U.S. Commerce, Justice and Treasury departments for illegal shipments of U.S.-made electronics to Iran and North Korea, in violation of the Export Administration Regulations (EAR) and Iranian Transactions and Sanctions Regulations.
   This was the largest U.S. penalty of its type ever imposed on a Chinese company. What contributed to the severity of the penalty was that despite knowledge of the U.S. investigations and repeated warnings to stop violating U.S. export control regulations, ZTE continued to divert U.S. technology to Iran.
   However, no link has been drawn between the ZTE penalty case and China’s recent push to implement a new export administration law. According to John Larkin, principal of Larkin Trade International, who has closely followed these regulatory developments in China for years, the Chinese government began work on the newly proposed export administration law several years ago.
   China has had some form of export controls in place since its accession to the World Trade Organization in 2001, with its most recent set of regulations promulgated in 2007. But these rules have been viewed as rather ineffective and China is under increasing pressure to demonstrate internationally that it has a firm handle on its export control activities.
   “China has expressed that getting the export administration law done this year is a priority according to their 2017 Legislative Plan,” Larkin said.
   China’s National People’s Congress is expected to conduct a first reading of the draft law in early 2018.
   The newly proposed Chinese export administration law in a number of respects mirrors U.S. export controls.

The newly proposed Chinese export administration law in a number of respects mirrors U.S. export controls.

   “It’s really closer to the U.S. export control system than any other country in a number of ways,” Larkin said.
   The proposed law, for instance, calls for the implementation of export control lists and a license management system, which will be put together by an interagency group of experts within the Chinese government.
   Chinese government officials will determine which items to place on the export control lists based on national security, technology development, international market supply, and treaty obligations.
   The draft law states that China’s export control authorities during the review of the export license applications also consider the national security implications and international obligations, sensitivity of the product, market situation, end users and end use, and level of internal compliance of the exporter. The Chinese government said its goal is to issue licensing for items on its dual-use list within 45 days of receiving an exporter’s application.
   “For exports of military arms and goods, exporters would have to not only comply with the licensing requirement applicable to the transaction but also be ‘qualified for exclusive export,’ which implies a registration like that imposed by the U.S. Department of State’s Directorate of Defense Trade Controls,” said Washington-based Sandler & Travis Trade Advisory Services in its review of the proposed regulations.
   Eric Carlson and Yan Luo of law firm Covington & Burling noted that the draft law “for the first time” includes language related to licensing of regulated Chinese technologies and data by non-Chinese citizens who are working within the country, known as “deemed” exports.
   Like the U.S. export control regime, China’s proposed export administration law also prescribes in some cases a requirement of an end-user and end-use verification for the licensed shipment, as well as placing controls related to the reexport or transfer in country of previously exported items, Larkin said.
   The proposed rules include an array of stiff penalties for violations. For example, exporting without a license could result in penalties of five to 10 times the value of the illegal transaction. Income for the illegal transaction may also be confiscated and export privileges suspended or revoked. Individuals involved in fraudulent activities related to export licenses may be assessed fines of up to 300,000 yuan (about $45,000).
   China’s Customs and Excise Department is expected to be the lead investigative and enforcement agency for the country’s new export control regime.
   The Chinese government invited industry comments related to the proposed export administration law through July 15. It’s unknown at this time how many companies or trade organizations responded.
   There’s concern within the industry that China may be tempted to use heavy-handed enforcement with its new export control rules or as a reciprocity mechanism against other countries during trade disputes.
   Larkin said it’s important for companies and trade associations to make their concerns with the proposed regulations known to China’s Ministry of Commerce.
   “We need to express our appreciation to the Ministry of Commerce for releasing this draft law for comment and ensure we take this opportunity to express our opinions, both positive and negative, as well as to relay our willingness to work with them in revising and finalizing the law,” he added. “We have found them to be receptive to industry comments in the past and expect that would be the same here.”
   “Companies active in China should continue to track the legislative developments and be aware of how the export control law, if enacted as drafted, might affect their operations, sales, or other relevant actions,” the Covington & Burling attorneys wrote.
   Paul DiVecchio, principal of DiVecchio & Associates, an export regulatory compliance consultancy, said that “failure to assign an export compliance officer; establish compliance training, education, policies and procedures; and a corporate culture of ‘due diligence’ will place a U.S. parent in jeopardy of manufacturing or warehousing products for redistribution outside of China. This proposal by MOFCOM is a mirror image of the U.S. ICP (internal compliance program).”
   Overall, Larkin believes the move toward updated export control regulations will be good for China.
   “This has been a topic of discussion for many years,” he said. “Having their export lists and regulations in greater alignment with the multilateral standards will be positive for all parties.”