The China Question

www.worldecr.com 32 ThE ChInAquESTIOn INSIgHT on companies that will likely present management challenges. ese include: l Assessing whether a proposed export should be controlled and proactively applying for a licence even when it is currently uncontrolled; l Deemed export provisions limiting the transfer of information within China; l Temporary restrictions on uncontrolled technologies and services for up to two years; and l Extraterritoriality requirements applic- able to companies or individuals violating its provisions outside of China Further, the consequences of violations can be steep depending on the violation. Financial penalties may be up to RMB 5 million or ten times the illegal gains of the transactions. Additional sanctions include imprisonment, licence withdrawal, business suspension, and loss of ability to export. To help put these requirements in the context of individual business practices, it’s important to spend some time reviewing the details of how the law operates and what this may mean for current supply chains. Further, understanding the nuances of the law may mean coordinating with the local China team to proactively determine risk points. 2) Assess other dual-use export control regimes Globally, export control regulations are taking a front seat with regulators – meaning that the impact of the ECL should not be assessed in isolation. Once the export compliance team has a working knowledge of the ECL, they should take a step back to identify what other regimes may also control products. For instance, does the EU’s emerging export control law apply to the products or information under review? How are the US regulations involved and what do they control? In particular, the extraterritorial nature of both US and Chinese laws means that export compliance teams sitting in third countries must juggle at least three jurisdictions’ laws: the US, China, and their home country. But knowing in advance where and how each product is controlled will help validate that transactions are compliant and shipments are not delayed. 3) Validate China’s existing lists of items controlled for export Once the trade department has assessed the ECL and other jurisdictions’ regulations, a secondary analysis should be conducted to determine if any of China’s existing regulations apply. ere are two in particular exporters should be aware of: (1) the Catalogue of Technologies Prohibited or Restricted from Export; and (2) the Catalogue of Dual-use Items and Technologies Subject to the Administration of Import and Export Licenses. e Catalogue of Technologies Prohibited or Restricted from Export is separate from the ECL and contains its own requirements. In the August 2020 amendment, additional products were subjected to control, including certain cryptographic security technology. e Catalogue’s controls are description-based so compliance professionals will probably need to team closely with engineers or product development specialists to achieve an advanced knowledge of potentially controlled items. Finally, it is imperative to understand whether a company’s goods are also controlled under the Catalogue of Dual-use Items and Technologies. Following the release of the cryptography control lists, China revised the Catalogue of Dual-use Items and Technologies Subject to the Administration of Import and Export Licenses. It’s notable that to determine whether the product or technology is controlled, the exporter needs the HS code, product name and description. While exporters may not have products controlled under each regime, it is likely there is some overlap. Clearly defining when a licence is needed and who on the China team has responsibility for making this determination will be critical to ensure that there are no impediments to moving goods. 4) Analyse current and future China supply chains Once the ECL-impacted products have been identified, the compliance team needs to validate its understanding of product flows. In most cases, achieving the requisite level of knowledge means engaging with business stakeholders. e export compliance team should consider sitting down with the supply chain, marketing, and sales teams to assess the entire life cycle of controlled products. Further, a pre- meeting questionnaire is sometimes issued to help focus the meeting on the most important issues. During the meeting, the teams should review how products and technical data are transferred today and any planned changes. Having this information enables the compliance team to prioritise supply flows with the highest risks, assign actions, gather information and develop a monitoring plan. It is worth noting that this type of collaboration is much easier when there is a good relationship in place between the business teams and export compliance. Not only will the business teams be more inclined to assist if they view export compliance as a partner, but the compliance team will get more complete answers to critical questions. 5) Document supply chains against controlled items With visibility into how products and technical data move, documenting these product flows in a central location is important. is mapping should highlight the jurisdictions and third parties involved in the products’ life cycles. It should also indicate points at which the product becomes controlled as this will not always be at the origination point. Once documented, the product flows should be widely accessible so that individuals whose responsibilities impact export compliance have access to the mapping. Additionally, a team member should be tasked with updating or validating the flows on a pre- determined basis. 6) Remediation In going through the deep-dive review process, it is not uncommon to discover violations. ese are oen associated with improper classification determinations, licensing mistakes, or sanctioned party errors. Fixing the past before making substantive changes to the export compliance programmes is important. is will likely include disclosing the errors to the appropriate government agencies. As part of the remediation process, the compliance team should plan to conduct a thorough root cause analysis to identify the underlying reasons these errors occurred. Although always important, it is particularly important when adjusting a compliance programme Once the ECL- impacted products have been identified, the compliance team needs to validate its understanding of product flows.