PRC Initiates Unreliable Entity List Investigation Against PVH Group

On September 24, 2024, the Ministry of Commerce (MOFCOM) of the People’s Republic of China (PRC) announced that it was initiating an investigation into the practices of the U.S. PVH Group in accordance with Article 2 of the PRC’s “Provisions on Unreliable Entity List [UEL]” (不可靠实体清单规定, UEL Provisions). This announcement marked the first time that Beijing 1) initiated a formal UEL investigation and 2) targeted a non-defense commercial entity for UEL investigation. With this announcement, UEL investigations are formally identified as one of the PRC’s investigative tools, along with anti-trust investigations, national security investigations, and tax fraud investigations, which can be employed against foreign commercial entities. 

Pamir assesses that, like most PRC laws and regulations, the UEL Provisions include vague and ambiguous language and assign considerable discretionary power to PRC regulatory authorities. In this respect, contrary to the conventional wisdom that the purpose of laws and regulations are to clarify and thereby create greater certainties, PRC laws and regulations contribute to greater uncertainties for American companies. In addition, they increase the likelihood that normal commercial activities in China will be politicized to serve the objectives of the ruling Chinese Communist Party.  

Beijing Creates the UEL 

The PRC government announced that it would set up its UEL system on May 31, 2019, 10 days after the U.S. government placed China’s Huawei Technologies on the U.S. Entity List. MOFCOM promulgated the UEL Provisions on September 19, 2020. Article 2 of the UEL Provisions stipulate that the UEL was created to respond to actions taken by foreign entities "in international economic, trade, and other relevant activities" that either "endanger China's national sovereignty, security, development interests" or "violate normal market transaction principles by suspending normal transactions with Chinese enterprises, other organizations, or individuals, or applying discriminatory measures against Chinese enterprises, other organizations, or individuals, thereby seriously damaging the legitimate rights and interests of Chinese enterprises, other organizations, or individuals.”   

The PRC’s UEL system mirrors the U.S. export control and sanctions regime jointly administered by the Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of State’s economic sanctions programs, and the various tools utilized by the Department of Commerce’s Bureau of Industry and Security (BIS).

• MOFCOM administers the UEL system through an interagency “working mechanism.” Members of the mechanism include representatives of PRC government agencies in charge of foreign affairs, industry policy, market administration, intelligence, and law enforcement.

According to an unnamed senior official of MOFCOM’s Bureau of Industry Security and Import-Export Control (产业安全与进出口管制局), MOFCOM’s investigation into the practices of the PVG Group, which owns the Calvin Klein and Tommy Hilfiger brands, is based on allegations that the U.S. group has engaged in “unwarranted boycott” of cotton products originating from Xinjiang. Based on the UEL Provisions, the investigation is likely to involve the following procedural steps:

• PVH will be asked to submit written explanations and related materials concerning its alleged practices within 30 days of MOFCOM’s announcement of investigation. The submitted materials must address whether the company has adopted discriminatory measures over the past three years against products originating from Xinjiang. 
• PVH will also be required to provide other materials requested by Chinese investigators. 
• MOFCOM investigators will question relevant parties, collect documents and materials, and undertake other unspecified actions. 
• MOFCOM will make the UEL determination based on the outcome of the investigation. 

The PVH investigation marks several firsts in the PRC’s administration of UEL. First, the PVH case is the first UEL case unrelated to violations of China’s national sovereignty. In February 2023, Lockheed Martin and Raytheon Missiles & Defense were placed on the UEL for selling arms to Taiwan. In May 2024, General Atomics Aeronautical Systems, General Dynamics Land Systems, and Boeing Defense, Space & Security were put on the UEL for the same violation. In this respect, the PVH case also marks the first time that MOFCOM is investigating a foreign company not involved in the defense industry.

The PVH case also marks the first time that MOFCOM is conducting an official investigation prior to placing foreign entities on the UEL. The aforementioned U.S. defense companies were placed on the UEL without known prior investigations. The UEL Provisions stipulate that the UEL working mechanism has the authority to determine whether it would be necessary to conduct investigations. A public announcement must accompany any decision to investigate, according to the UEL Provisions. 

Lastly, unlike China’s previous UEL cases, which targeted subsidiaries of U.S. corporations, the PVH investigation is the first case that targets an entire foreign commercial entity. 

UEL Provisions Grant PRC Authorities Extensive Discretionary Power

On October 16, approximately four weeks after the announcement of the UEL investigation against PVH, MOFCOM published FAQs to explain the PRC’s UEL system. Citing Article 7 of the UEL Provisions, the FAQs indicate that the decision whether to place a foreign entity on the UEL is based on the following considerations: 

• “The degree of harm to China’s national sovereignty, security, and development interests.”
• “The degree of harm to the legitimate rights and interests of Chinese enterprises, other organizations, or individuals.”
• “The extent to which the practices [of the foreign entity in question] meet internationally accepted economic and trade rules.”
• “Other factors that should be considered.”

This article illustrates how the UEL Provisions are similar to other PRC laws and regulations in that they do not contain precise language, especially with respect to how a foreign entity may run afoul of the provisions, which is also exemplified by the aforementioned Article 2. This lack of precision gives PRC authorities considerable interpretive power, with potentially significant consequences for foreign companies. In this instance, Article 7 gives PRC authorities discretionary power to determine punitive measures based on their interpretation of “the degree of harm” to PRC interests.

In a similar vein, the UEL Provisions grant the UEL working mechanism authority to determine whether to remove a foreign entity from the UEL without providing the conditions or requirements on which this determination should be based. Instead, Article 13 of the provisions merely stipulates that the working mechanism’s determination should be “based on actual situation.”