Law Firm Expects 'Increased Enforcement' of China's Unreliable Entity List

Companies should expect China to increase the use of its so-called Unreliable Entity List following the addition of U.S. defense companies Lockheed Martin and Raytheon to the list in February (see 2302160064 and 2304180029), Beijing-based Zhong Lun law firm said in an April client alert posted by Lexology. The firm said “we anticipate” that the “trade ban rules may be developed into a full-fledged and well-designed mechanism with increased enforcement of the UEL Provisions in the future,” saying Chinese companies should make sure they're running “effective compliance programs” to comply with the list.

The firm also said some questions surround the reach of the list, including whether it applies to companies majority owned by Lockheed and Raytheon. Zhong Lun said it believes a “50% rule or a similar penetrating rule applies” to subsidiaries and “related entities within Chinese jurisdiction.” But “for foreign entities, further clarifications from the authority may be necessary.”

Chinese companies also should be careful not to help UEL companies circumvent the restrictions, Zhong Lun said, which could subject them to “administrative punitive measures or even criminal charges.” The firm said the list’s “anti-circumvention mechanism” may be “extended to upstream or downstream products as well" and may lead to the Chinese equivalent of U.S. foreign direct product rule restrictions the U.S. uses to restrict exports of foreign-produced items made with certain U.S.-origin items or technology.

“This would further enhance the authority's efforts to prevent circumvention activities and limit the ability of the sanctioned entities to engage in military-related business,” the law firm said.