China Updates and Expands Its Dual-Use ICP Guidance

May 2021 - Michael Ingram

On 28 April, the Ministry of Commerce (MOFCOM) of the People’s Republic of China promulgated its first dual-use internal compliance guidance in fourteen years.

Entitled Announcement (2021) No. 10 “Guiding Opinions of the Ministry of Commerce on the Establishment of Internal Compliance Mechanisms for Export Control by Export Operators of Dual-use Items,” this Announcement updated the guidance for establishing and enhancing dual-use internal compliance programs (ICP) for Chinese companies.  The previous guidance was issued in 2007 through Announcement (2007) No. 69.

China’s first and comprehensive Export Control Law, which entered into force in 2020, was the primary impetus for the guidance update on ICP. While much of the 2021 guidance on compliance programs is similar to the 2007 version, there are a number of notable changes, as shown below.  Foreign companies operating in China and working with potentially export-controlled items should be sure to implement compliance programs that reflect the key ICP elements outlined in the guidance document.

Comparing the Guidance Documents: 2007 vs. 2021

Background

China’s domestic technological capabilities have dramatically increased since the previous guidance was issued in 2007; as such, Chinese high technology companies now face stiffer regulatory pressure as they expand further into international markets. In 2021, China has greater incentives to control domestically produced high-technologies and counteract similar measures originating from the United States, European Union, and others. The 2021 guidance reflects both the legal authority enshrined in the Export Control Law of 2020 and the necessity of enticing Chinese companies to establish or enhance their own compliance systems.

The Preamble

Changes to the preamble of the 2021 guidance compared to the 2007 guidance are instructive of the Chinese government’s goals for export control.

In 2007, the first line of the preamble touted effective export control measures as important to “maintain national security and achieve non-proliferation objectives.” However, in 2021, the importance of export control measures has broadened to “safeguard national sovereignty, security, development interests and fulfill international obligations”. Notably, the explicit mention of China’s opposition to the “proliferation of weapons of mass destruction and their means of delivery” has been dropped in 2021, having been replaced by the more general commitment to fulfilling international obligations.

A second noticeable change in the preamble is the addition of explicitly political language as it relates to MOFCOM’s mission. MOFCOM’s mission is now framed under “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” (习近平新时代中国特色社会主义思想) to advance China’s political goals (detailed in Figure 1). The preamble states that in accordance with the Export Control Law and “in light of the new characteristics of the export control work in the New Era,” this new guidance has been issued urging exporters of dual-use items to establish ICP.

Figure 1. Political Goals of the CCP applied to MOFCOM

The addition of such explicit political language is no small change as it ties the establishment of ICPs by domestic dual-use exporters closer to the overarching political goals of China. This is likely intended to put additional pressure on intransigent businesses to implement what would be an extensive change to current Chinese business culture. Indeed, since 2007, the adoption of full-fledged compliance programs has been slow, but the framing of the updated guidance in explicitly political terms underlines the seriousness of Chinese authorities to jumpstart more robust compliance programs.

Section 1: Guiding Principles

The 2021 ICP guidance is organized in five sections.

The first section of the 2021 ICP guidance is entitled “Guiding Principles,” as it was in 2007. However, it introduces notable textual changes. In 2007, it led with imploring businesses to “establish internal control mechanisms,” whereas in 2021 it begins with a tacit recognition of the Export Control Law: “exporters shall consciously and strictly abide by related laws and regulations of the State concerning export control.” This suggests a shift from the goal of building up compliance to the work of maintaining and refining existing compliance capabilities.

Similarly, in 2021, the guidance urges businesses to act in accordance with the policy of “perfecting systems, participating by all staff, strictly implementing and regulating operations” (“健全制度、全员参与、严格执行、规范经营” 的方针). This new policy implies refining the existing export control systems, whereas in 2007 businesses were urged to act in accordance with the policy of “top-level construction, top-down, full participation and system management” (“顶层建设、自上而下、全员参与、制度管理”的方针).

Although the majority of Chinese businesses have yet to make meaningful progress in establishing ICPs, it is clear the Chinese government wants domestic exporters to shift from a tentative approach to compliance to a more robust mode.

Section 2: Basic Principles

The second section of the 2021 guidance is entitled “Basic Principles” as it was in 2007. There are three Basic Principles, each of which has been, in whole or in part, changed:

  1. The Principle of Legality (合法性): the first principle in 2021 has been renamed from 2007’s Principle of Law-Abiding (守法). The change in legal terminology implies a shift in perspective regarding the importance of ICP. The Principle of Legality requires that exporters “shall take the strict implementation of related laws and regulations of the State concerning export control as the basic principle for establishing the internal compliance mechanism for export control.” In 2007, “strict implementation” of export control measures was instead framed as a “prerequisite and condition” for carrying out foreign trade. Similarly, in the previous guidance, the establishment of ICP to ensure “strict implementation” of laws and regulations was framed as an “important part of… business philosophy.” In 2021, this has been replaced with an exhortation of businesses to act in line with export control policy. It also explicitly mentions that businesses “shall bear corresponding legal liability” for violations, whereas previously there was no mention of liability.
  2. The Principle of Independence (独立性), the second principle in 2021 is named the same as in 2007. It is notable that the 2021 version drops what was potentially the strongest language of the 2007 version: “An enterprise’s export control obligations should be placed above its business interests.” Instead, it reaffirms as in 2007 that ICP is “an important part” of the management system and should “exist independent” of the management system. It further describes that through ICP, businesses should “regulate and self-monitor their business behaviors” and exercise the “right of veto” on behaviors that violate national laws and regulations.
  3. The Principle of Effectiveness (实效性), the third principle in 2021 has been renamed from 2007’s Principle of Comprehensive Control (全面控制). This third principle has undergone the most change in the 2021 update. In 2007, this principle called upon enterprises to apply for export licenses, regardless of whether an item is on a control list (catch-all provision), if the exported item is “at risk of proliferation.” In 2021, with the dropping of language regarding proliferation, this principle instead calls for exporters to establish an “effective internal compliance mechanism for export control in accordance with the actual business situation.”  It also mandates implementing an ICP through “high-level attention, full participation, full control, regular evaluation and continuous improvement.” The 2021 version more closely matches best practice ICP guidelines set forth by other countries.

Section 3: Basic Elements

The third section of the 2021 ICP guidance is entitled “Basic Elements” as it was in 2007.

The changes to this section are less philosophical than the aforementioned section and bring Chinese standards closer to the traditional elements of best practices common to western compliance systems. Section 3 describes the basic elements an ICP should have.

Notably, the 2021 guidance defines 9 elements (I – IX). This is an increase from the 2007 guidance which defined 6 elements (A-F).

Aside from quantity, it is also instructive to compare the 2021 guidance elements to the 2007 elements and what could be called the international meta-elements of compliance (which are a simplification of existing elements as provided by approximately 32 governments’ ICP guidance documents).

Figure 2. Comparing ICP Elements: China Guidance and International Standards*

In comparing the 2021 and 2007 elements, there were some notable changes in the language:

  1. Developing a Policy Statement. This element shares its name with the 2007 version. It corresponds to the Management/Corporate Commitment in western compliance systems. In the 2021 version, senior management must sign a written commitment to “strictly implement the laws and regulations of the State concerning export control” so as to reflect the “Principle of Legality.” The Principle of Legality is not mentioned in the 2007 version. While the 2021 version has less detail than the original description of what a corporate policy statement should include, it does require that this statement should be made known to all staff internally and may be used publicly, as opposed to the 2007 requirement of being “published in an appropriate form”.
  2. Establishing the Organization. This element shares its name with the 2007 version. It corresponds to the ICP Organization/Administration element in western compliance systems. It remains relatively unchanged compared to 2007. It requires businesses to establish an organizational structure for ICP and clarify responsibilities for departments and personnel. In both the 2021 and 2007 versions, the “Principle of Independence” is mentioned. It also supports the authorization of empowered personnel to stop objectionable exports and warns against having only one person responsible for compliance decisions.
  3. Comprehensive Risk Assessment. This is a new section in 2021. This element shares aspects of a traditional internal audit. It requires companies to “conduct a comprehensive assessment of the export control risks” and identify “business links” that may be prone to non-compliance. It then describes what contents the assessment should cover. It also advocates that companies update their ICP based on assessment findings. Finally, it prompts companies to contact the authorities if they have questions during assessments.
  4. Establishing a Review Process. This section has been renamed from the 2007 element: Developing a Review Process. It roughly corresponds to Transaction Screening in western compliance systems. Essentially, it requires companies to have standard operating procedures for reviewing whether items are controlled, who the end-user is and where they are located, and what the end-use is. Like the 2007 version, it references awareness of sanctions by the United Nations and “other sensitive countries.” This section features many points commonly associated with Red Flags for compliance.
  5. Developing Emergency Measures. This is a new section in 2021. It corresponds with Reporting and Corrective Action in western compliance systems. This element begins with an exhortation for companies to improve their employees’ “risk awareness” and have an internal channel for reporting violations and suspicious transactions. If it is found that an appropriate license has not been sought, it prompts companies to contact the authorities. It also states that a license should be sought for any item with “relative risks” even if not explicitly designated on the control list (i.e., “catch-all”).
  6. Conducting Education and Training. This section shares its name with the 2007 version. It corresponds to Education and Training in western compliance systems. It covers much the same ground as in 2007, prompting companies to have a training plan and conduct regular training for all relevant staff. While it goes into less detail over what forms training might take, it does have a new mention of “export control training as an indicator for the performance assessment of their employees.”
  7. Improving Compliance Audit. This is a new section in 2021. This section corresponds to the Audit (Internal & External) requirement in western compliance systems. It calls for exporters to “regularly audit the reasonableness, feasibility and effectiveness” of their ICP. The audit per the guidance should reflect the ICP’s operation and offer a means of “rectification,” meaning corrective action, if unsatisfactory. It specifies the use of both internal and external third-party audits.
  8. Retaining Data Files. This section shares its name with the 2007 version. It corresponds to Recordkeeping in western compliance systems. It outlines documents and information that should be retained but does not specify any time requirements for said retention. Retention periods are however specified in the Export Control Law of 2020.
  9. Development of Management Manual. This section shares its name with the 2007 version. While not traditionally a separate element in western systems, it corresponds to ICP Manuals commonly made available to staff and published on company websites. The 2021 version calls for the content to cover the “aforementioned basic elements” and “popularize the national laws, regulations and compliance systems of export control” so that employees are aware of their obligations and any relevant updates.

A contemporary survey done by our team of current ICP guidelines, published by government agencies specifically, suggests a natural clustering around consistently recurring elements. The 9 elements specified by the 2021 guidance bring Chinese compliance elements closer in line with international standards.

Section 4: Promotion Measures

The fourth section of the 2021 ICP guidance is entitled “Promotion Measures”, which has been renamed from 2007’s “The Government-Enterprise Linkage and the Implementation of Working Arrangements.” This section outlines how MOFCOM and other authorities can enable companies to better establish and maintain ICP.

MOFCOM now has six stated promotion measures, as opposed to 2007 guidance’s five working arrangements.

The six promotion measures are as broadly described below:

  1. Releasing the Internal Compliance Guide for the Export Control of Dual-use Items: This document is released as an Appendix to the 2021 guidance.
  2. Providing the Exporters with the Corresponding Licensing Facilitation: This also provides for “lighter or mitigated administrative penalties” if a company undertakes “the initiative to eliminate or mitigate the harmful consequences” of violations of export control law.
  3. Enhancing Export Control Compliance Information Services: This is a new addition for 2021. It holds the authorities to timely promulgation of laws and regulations and to providing updates about export control globally.
  4. Supporting Competent Departments for Training and ICP Guidance: This allows for authorities to conduct training, publicize compliance and support companies in establishing ICP.
  5. Enhancing Building of Export Control Teams and Providing Consulting Services: This provides for support regarding policies, regulations and ICP development.
  6. Organizing to Evaluate ICP: This serves to promote the assessment and improvement of ICPs.

Section 5: Miscellaneous

The fifth section of the 2021 ICP guidance is entitled “Miscellaneous.”  This is a wholly new section that was not present in the 2007 guidance. It adds several notable requirements for exporters.

Paragraph (I) calls on exporters who apply for “End User and End Use Certificates” to establish an ICP for import controls. Paragraph (II) requests that exporters/importers of goods, pre-cursor chemicals, and providers of freight shipping, customs declarations, e-commerce, and financial services for dual-use goods establish a corresponding ICP. Paragraph (III) requests that enterprises and scientific research institutes engaged in R&D and production of dual-use goods likewise establish an ICP.

Finally, Paragraph (IV) invalidates the 2007 guidance.

Conclusions

The publishing of China’s 2021 ICP guidance represents a maturation in Chinese compliance standards. While there remains a large gap between the official standards and the uniform implementation of those standards, the 2021 ICP guidance reflects the Export Control Law of 2020 in its pursuit of comprehensive compliance.

Notably, Chinese compliance has shifted from a focus on the proliferation of WMD to dual-use controls for achieving national security objectives. This corresponds to trends in the priorities of western countries. The political overtones to the 2021 guidance underscore the Chinese government’s desire to have companies seriously implement the recommendations. Companies with a footprint in China should also take note of the growing attention to export controls for achieving security and economic objectives.

[*] The international meta-elements are adapted from Scott Jones’s November 2019 WECR article “The proliferation of ICP standards: Theme and little variation (or, so what?)” which compiled a standardized set of best practices compliance elements based on approximately 32 sets of government ICP guidelines.

DISCLAIMER

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials herein are for general informational purposes only.