Establishment of “Unreliable Entity List”, A New Start of China’s Blacklist System
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On 31 May 2019, MOFCOM announced that the Chinese government will introduce an “Unreliable Entity List” (UEL) of foreign enterprises, organizations and individuals that threaten the interests of Chinese enterprises. It stated that foreign enterprises, organizations or individuals that fail to comply with market principles, deviate from a contract’s spirt and boycott or cut off supplies to Chinese companies for non-commercial purposes and cause serious damages to Chinese companies would be included in the UEL.

No official statement has yet been made regarding when the initial list will be announced and what specific restrictions would apply to the listed entities under Chinese law. However, the impact of UEL on related entities should not be underestimated.

-          What is the UEL?


According to the official statement of MOFCOM, UEL refers to a list of foreign enterprises, organizations and individuals that fail to comply with market principles, deviate from the spirit of contract and boycott or cut off supplies to Chinese companies for non-commercial purposes and cause serious damages to Chinese enterprises’ rights and interests. From the concept of UEL and its legal basis, namely, the Foreign Trade Law, the Anti-Monopoly Law and the National Security Law, it could be seen that the regime of UEL is mainly a trade-type measure targeted at foreign entities, which also involves certain trade-related competition policies.

 Principally, China’s regime of UEL is to ensure the stability of its important industry supply chain, which is different from the “entity list” of other countries which is mainly a measure of export control with the aim to limit the export of key technologies or goods. The main measures of China’s UEL may include some other restrictions or penalties for enterprises in the list. We understand that companies listed on UEL may mainly be enterprises that supply the Chinese market through trade channels and may also include logistics enterprises. Generally, the main target of UEL is the trade behavior of enterprises rather than their investment behavior.

-          Why is UEL introduced?


At present, the globalization has been threatened and buffeted in many ways, and Sino-US relations have become increasingly tense. Especially in recent years, the standards of US “Entity List” have become increasingly complex and ambiguous and the sanctions and foreclosure of Chinese high-tech companies, e.g. Huawei, signifies the evolution of the US “Entity List” into a tool for non-commercial behavior and vicious competition, which poses a serious threat to the stability of global value chain. Prior to UEL, China lacked specific measures against these abnormal, non-market-based boycotting or cutting off supplies in international trade. On one hand, the provisions of the Anti-Monopoly Law are more in principle, and there is no clear definition of concepts such as “justifiable reason”; on the other hand, the China Export Control Law is still under development and it is difficult to cover the response measures to the boycott or cutting off supplies. In this context, the Chinese government decided to establish the UEL regime by referring to international practices, with the aim of safeguarding China’s national security, social public interests, and the rights and interests of Chinese enterprises, as well as protecting the normal business order of international trade and investment. The establishment of the UEL regime is not only a measure to improve China’s foreign trade legal system and maintain China’s foreign trade relations, but also a necessary measure to cope with the current international economic and trade environment changes and protect the normal business order of international trade and investment.

-          Who will be included in UEL?


According to the MOFCOM officials, the government would consider the totality of the circumstances in listing a foreign business, including (i) the specific “discriminatory measures” taken by the foreign business against Chinese companies, such as boycotting or cutting off supplies to Chinese companies, (ii) whether these measures are taken for non-commercial purposes and against the market rules and contractual obligations, (iii) the material damage caused to the Chinese companies and the related industries, and (iv) the potential threat to China’s national security.

 It sets a clear scope for the definition of UEL in terms of the performance, nature, and consequences of related entities’ behaviors. First, the relevant entities have adopted discriminatory measures such boycotting or cutting off supplies towards Chinese enterprises. Secondly, the discriminatory measures are based on non-commercial purposes, contrary to market principles and the spirit of the contract. Finally, in determining whether to list an entity into UEL, it is also necessary to consider the actual harmful consequences of the relevant behavior of the entity, to both the enterprise itself and the relevant industry, as well as the degree of threat to China national security. It shall be noted that the requirement for degree of damage to enterprises and related industries is “material”, while to national security issue, it only needs to constitute “a threat” or “potential threat”.

Currently, there are no specific implementation regulations yet and it is unclear whether or when such regulations will be issued. We understand that the above circumstances have given the relevant authorities some discretion. The investigations, analysis, and judgments shall be case by case, based on different behaviors of different entities. Procedurally, the relevant departments may conduct investigations in accordance with the law and list those suppliers who have caused damage to Chinese enterprises to the UEL. In addition, entities in the UEL will also be dynamically adjusted. It is learned that subject to relevant regulatory procedure, the official document of UEL and the initial list will be released by MOFCOM soon.

-          What are the consequences of being included in UEL?


As stated by the official of MOFCOM, China will take any necessary legal and administrative measures to the entities listed in UEL, in accordance with Foreign Trade Law, the Anti-Monopoly Law, the National Security Law and other relevant laws, regulations and administrative regulations.

 However, it is still unclear what legal and administrative measures are specifically adopted to entities listed in UEL. Considering the different provisions of the Foreign Trade Law, the Anti-Monopoly Law and the National Security Law, and the above four circumstances, we assume that the specific measures still need to be combined with the specific behavior of the relevant entities, case by case.

-          How to be removed from the list? What are the remedies?


There are no further refinements on the specific implementation of the UEL regime. However, it was clearly stated by the official of MOFCOM that there will be an investigation procedure for listing enterprises into UEL, and the relevant stakeholders will have relevant right of defense. According to the relevant standards, the entities in the list will also adjust accordingly.

We assume that before or after an entity is listed, the relevant departments will have certain investigation procedures to allow the relevant companies to appeal or make other corresponding commitments to avoid being included in the UEL. After being listed, decision of removal from UEL could also be made if certain conditions are met. The inclusion and removal of the UEL will be a dynamic process and the list will be updated from time to time.

With the establishment of China’s UEL regime, we recommend all relevant enterprises, individuals or other entities to pay close attention to the specific implementation regulations to be released, in order to effectively prevent risks and ensure the legal compliance of relevant production, operation and trade.