Chinese Export Control Law to Challenge Compliance Programs, Law Firms Say

China’s new export control law (see 2010190033 and 2010220024) is expected to significantly impact trade and may include “very broad” catch-all controls, leading to compliance burdens for companies doing business in China, law firms said. Businesses should review their compliance programs to make sure they are prepared for the regulations and to avoid potential Chinese penalties, firms said, which could be severe.

“One thing is clear: the Chinese government is preparing to impose sweeping new requirements on transactions involving Chinese goods and technology,” the Paul Hastings law firm said in a Nov. 2 post. “All companies doing business in or with China must take notice.”

While companies are still trying to decipher how the regulations will impact them, similarities can be found between the Chinese law and U.S. export control and sanctions regimes, Paul Hastings said. The firm said “many of the requirements” will be recognized by companies familiar with the U.S.’s Export Administration Regulations, while Beijing-based Zhong Lun Law Firm said Nov. 2 that China’s unreliable entity list is expected to more closely mirror the U.S Treasury Department’s Specially Designated Nationals List.

But other elements of China’s export control law “find no direct equivalent” to U.S. regulations, Paul Hastings said. One of those elements is China’s introduction of preferential benefits -- including blanket general licenses -- to companies that establish “effective” internal compliance programs. China may introduce more benefits as it updates the law, Zhong Lun said, which could “greatly reduce the administrative approval costs” associated with exports. The firm expects China to provide “significant incentives” to compliant exporters.

The new Chinese law also includes increased due diligence requirements. China will require exporters to “acquire approvals before engaging in any transaction” wherein the exporter “knows or should have known” that the export may damage China’s national security, Paul Hastings said. The firm called that provision a “potentially unlimited discretionary control that is not found in U.S. law.”

That and other provisions could lead to “very broad catch-all provisions,” according to a Nov. 2 post by MME, a legal, tax and compliance consulting firm. The firm also said some export control provisions remain unclear, such as the possibility of China imposing a de minimis-related restriction on certain exports. “There seems to be no clarity on license requirements” for goods “containing controlled Chinese content above a given de minimis level,” the firm said, adding that this “must be closely monitored.”

MME said companies should continually update their export compliance programs and counterparty screening tools to keep up with the constantly changing sanctions landscape, especially amid growing tension between the U.S. and China. “Companies are advised to carefully evaluate the commercial, legal and reputational risks of non-compliance,” the firm said. “Consequences may include supply chain disruptions, market access limitations and costly penalties.”

The firms said “many aspects” of the export control law have yet to be released. This includes China’s control list -- the “heart of the entire system,” Paul Hastings said -- and general guidance from the Chinese government on how it will interpret compliance programs and monitor end-uses.

But companies should not wait for more details to be released before bolstering their compliance programs, the firm said. “The implementation of the law will have a significant and direct impact on the trade related business of both onshore and offshore enterprises,” Zhong Lun said, “and bring challenges to their internal export control compliance.”