China's MOFCOM: Foreign Companies May Face "Unreliable Entity" Sanctions for Non-Market-Based and Discriminatory Decoupling, with Option for Removal via Self-Correction
Mixed message
A few weeks after the Ministry of Commerce of China (MOFCOM) placed the U.S. company PVH Group on the "Unreliable Entity List," the Ministry issued a FAQs on the Unreliable Entity List regime.
As we analyzed previously, this listing is unusual. The justification for these sanctions is: “PVH Group is suspected of violating normal market transaction principles concerning Xinjiang-related products, disrupting normal trade with Chinese companies, other organizations, or individuals, and taking discriminatory actions.”
Previously, China's sanction practices had been more precisely targeted at actions that “damage China’s sovereignty and territorial integrity” or “interfere in China’s internal affairs.” However, when it came to entities cutting ties with Chinese companies due to foreign political or legal pressure (commonly referred to as “decoupling” 脱钩断链), China had generally shown tolerance and restraint, and there was no precedent for sanctioning such entities.
However, in this FAQs, MOFCOM seems to have made it very clear that the behaviour targeted by the “Unreliable Entity List” regime is not only about “endangering China’s national sovereignty, security, and development interests,” but also includes “violating normal market transaction principles, interrupting normal transactions with Chinese enterprises, other organizations, or individuals, or taking discriminatory actions that seriously harm the legitimate rights and interests of Chinese enterprises, other organizations, or individuals.”
MOFCOM further emphasized that if the facts of such actions are clear, even without external suggestions or reports, MOFCOM has full authority to independently decide to place the entity on the "Unreliable Entity List." In addition, the “Unreliable Entity List” regime does not target any specific country or entity, and China “will implement it following international rules”.
The FAQs also highlighted that entities listed on the “Unreliable Entity List” have channels for remedy. Some may be removed from the list if they correct their behaviour within a specified time period, while others may have their Chinese partners apply to MOFCOM for permission to continue transactions with the listed entity, but only under "special circumstances," with the final decision resting with MOFCOM. Also, MOFCOM has the sole discretion to decide when to remove a foreign entity from the list.
Below is the full translation of the FAQs:
FAQs on the Unreliable Entity List System
On October 16, 2024, the China Export Control Information Network released the "Frequently Asked Questions on the Unreliable Entity List System." The full text is as follows:
Since September 19, 2020, China has implemented the Provisions on the Unreliable Entity List (hereinafter referred to as the "Provisions").
1. What is the purpose of establishing the Unreliable Entity List system?
Answer: Article 1 of the Provisions states that the Unreliable Entity List system is established to safeguard national sovereignty, security, and development interests, maintain a fair and free international economic and trade order, and protect the legitimate rights and interests of Chinese enterprises, other organizations, or individuals.
2. What is the legal basis for the Unreliable Entity List system?
Answer: According to Article 1 of the Provisions, the legal basis for the Unreliable Entity List system includes the Foreign Trade Law, the National Security Law, and other relevant laws.
3. Who is targeted by the Unreliable Entity List system, and what actions are addressed?
Answer: According to Article 2 of the Provisions, the state establishes the Unreliable Entity List system to take appropriate measures against foreign entities that engage in the following actions during international economic and trade activities:
(a) Endangering China's national sovereignty, security, or development interests;
(b) Violating normal market transaction principles, interrupting normal transactions with Chinese enterprises, other organizations, or individuals, or taking discriminatory measures against Chinese entities, thereby seriously harming the legitimate rights and interests of Chinese enterprises, other organizations, or individuals.
The term "foreign entity" in these Provisions refers to foreign enterprises, other organizations, or individuals.
4. Does the establishment of the Unreliable Entity List system indicate a change in China's attitude toward welcoming and protecting foreign investment?
Answer: According to Article 3 of the Provisions, the Chinese government adheres to an independent foreign policy, upholds basic international relationship principles such as mutual respect for sovereignty, non-interference in internal affairs, and mutual benefit, and opposes unilateralism and protectionism. It is committed to safeguarding its core interests, maintaining the multilateral trading system, and promoting an open world economy.
China’s firm support for multilateralism remains unchanged, as Article 3 of the Provisions reaffirms this stance. The Provisions do not target any specific country or entity, and China will implement the Provisions in accordance with international rules.
5. Which department is responsible for implementing the Unreliable Entity List system?
Answer: According to Article 4 of the Provisions, the state establishes a working mechanism comprising relevant departments of central government agencies (hereinafter referred to as the "working mechanism") responsible for organizing and implementing the Unreliable Entity List system. The office of the working mechanism is located within the competent commerce department of the State Council.
6. What are the criteria for listing foreign entities on the Unreliable Entity List?
Answer: According to Article 7 of the Provisions, the working mechanism will decide whether to include a foreign entity on the Unreliable Entity List based on the results of an investigation, considering the following factors and then making an announcement:
(a) The degree of harm to China's national sovereignty, security, and development interests;
(b) The extent of damage to the legitimate rights and interests of Chinese enterprises, other organizations, or individuals;
(c) Whether the actions comply with internationally accepted economic and trade rules;
(d) Other relevant factors that should be considered.
7. What is the process for listing foreign entities on the Unreliable Entity List?
Answer: Articles 5, 6, and 8 of the Provisions outline two methods for listing foreign entities on the Unreliable Entity List: after an investigation or directly listing them.
Article 5: The working mechanism will decide whether to investigate based on its authority or suggestions/reports from relevant parties. If an investigation is initiated, it will be publicly announced.
Article 6: The working mechanism may investigate foreign entities by questioning involved parties, reviewing or copying relevant documents, and using other necessary means. During the investigation, the foreign entity may provide statements or defenses.
The working mechanism may suspend or terminate the investigation based on actual circumstances. If the facts change significantly, the investigation may resume.
Article 8: If the facts of the foreign entity's actions are clear, the working mechanism may directly consider the factors outlined in Article 7 and decide whether to list the entity on the Unreliable Entity List. If listed, an announcement will be made.
8. What measures will be taken against foreign entities listed on the Unreliable Entity List?
Answer: Article 9 of the Provisions states that the announcement listing a foreign entity on the Unreliable Entity List may warn of the risks associated with trading with that entity. It may also specify a timeframe for the foreign entity to rectify its actions based on actual circumstances.
Article 10: The working mechanism may impose one or more of the following measures against listed foreign entities, and such measures will be announced:
(a) Restricting or prohibiting the entity from engaging in import and export activities related to China;
(b) Restricting or prohibiting the entity's investments in China;
(c) Restricting or prohibiting entry of the entity's related personnel or transport vehicles into China;
(d) Restricting or canceling relevant personnel's work permits, stay, or residence qualifications in China;
(e) Imposing fines based on the severity of the violation;
(f) Any other necessary measures.
The relevant authorities will implement these measures according to their responsibilities, and other relevant units and individuals are expected to cooperate.
9. Are there any exemptions?
Answer: Article 11 of the Provisions states that if a foreign entity rectifies its behavior within the specified timeframe mentioned in the announcement, the measures under Article 10 will not be applied. If the entity fails to rectify its behavior by the deadline, the measures will be enforced as stipulated in Article 10.
Article 12: If a foreign entity is restricted or prohibited from engaging in China-related import and export activities, but a Chinese enterprise, organization, or individual needs to conduct transactions with the entity under special circumstances, they must apply to the office of the working mechanism, and upon approval, they may engage in relevant transactions.
10. How can a foreign entity be removed from the Unreliable Entity List?
Answer: According to Article 13 of the Provisions, the working mechanism may decide to remove a foreign entity from the Unreliable Entity List based on actual circumstances. If the entity corrects its behavior and eliminates the consequences of its actions within the specified timeframe, the working mechanism should make the decision to remove it from the list.
Foreign entities may also apply to be removed from the list, and the working mechanism will decide whether to remove them based on the circumstances.
The decision to remove a foreign entity from the list will be publicly announced. From the date of the announcement, any measures imposed under Article 10 will cease to be effective.