Questions Surround Penalties Under China's Unreliable Entity List, Law Firm Says

Several “unresolved issues” surround fines imposed against companies placed on China’s Unreliable Entity List, including the maximum penalty amount China can impose and the penalty range it can choose from, Beijing-based Zhong Lun Law Firm said in an April client alert posted by Lexology.

Although China said its placement of Raytheon and Lockheed Martin on the UEL in February (see 2302160064 and 2304180029) would result in a fine of “twice the amount of their respective arms sales” to Taiwan, the UEL provisions don’t “explicitly” specify an “upper limit” for penalties, the law firm said. Zhong Lun also stressed that China’s UEL regulations don’t “specify the amount or range of fines” that can be imposed, only that “the fine be appropriate and corresponding to the severity of the circumstances.” China may in some cases impose a fine “higher than the actual or potential damage suffered by Chinese companies,” Zhong Lun said, “for example, several times the damage incurred.”

Zhong Lun said the fine against the two American defense firms “may be considered moderate in this case,” stopping short of saying it sets a precedent for future penalties.

“[I]t would be inappropriate to assume that such ratio would serve as a norm or standard for determining the amount of fines in other future potential scenarios,” the firm said. “In instances of more severe unreliability, a higher ratio of a fine to the related contract value may be deemed suitable.”

It also remains unclear how China will enforce its fines against Raytheon and Lockheed. Zhong Lun noted that if a penalty isn’t paid by the due date, China can increase the penalty by 3% daily, but the total amount of the additional fine can’t exceed the original penalty.

The firm expects to gain more insight from the UEL penalty process as China announces more cases. “[W]ith the possibility of further investigations into the unreliability of foreign entities in the future, a clearer roadmap for understanding the determination and structuring of fines may be presented,” it said. “At least for now, it is important for entities (if listed on the UEL) to comply with the specified period for fine payment to avoid incurring additional penalties, as an overdue fine can result in further financial consequences.”