By Huang Jianwen King & Wood Mallesons’ Investment Group
Although China has experienced rapid growth in the numbers of foreign non-governmental organizations (“NGOs”) carrying out activities within its borders in the past 10 years, foreign NGOs have remained loosely and ambiguously regulated in China. For example, as for the establishment of representative offices by foreign NGOs in China, currently only the Regulation for the Administration of Foundations provides the legal basis for foreign foundations to establish representative offices in China. There are no unified laws and regulations at the national level governing the establishment of representative offices or carrying out activities by the other foreign NGOs except for foreign foundations. This brings doubt and difficulty for many foreign NGOs carrying out activities in China.
The latest draft of the Foreign NGO Management Law (Second Draft) (the “Foreign NGO Draft Law”) can be seen as a preliminary attempt by PRC regulators to introduce more transparency and regulatory oversight to the often nebulous world of international NGOs operating in China. The Legal Affairs Committee of the Standing Committee of the National People’s Congress opened the Foreign NGO Draft Law to public comments, including those from foreign NGOs, on May 5, 2015.
Although the Foreign NGO Draft Law has not been officially promulgated, is not a binding legal document, and may be subject to further amendments, it provides insight into how PRC regulators will manage foreign NGOs in the future and in its final form, it may be a landmark piece of legislation governing the operations of foreign NGOs in China. As such, those that are part of, or are looking to be a part of, the foreign NGO community in China would be well-advised to keep close track of any developments related to the Foreign NGO Draft Law.
This article provides a basic introduction to the Foreign NGO Draft Law and outlines some of its major provisions. Foreign NGOs with activities in China or that are looking to initiate activities in China should consult with the appropriate legal counsel on the ramifications of the Foreign NGO Draft Law.
Purpose and governing scope of the Foreign NGO Draft Law
Article 1 of the Foreign NGO Draft Law states that it “is designed to standardize and guide all activities carried out by foreign NGOs within China and to protect their rights and interests while promoting exchange and cooperation.” The Foreign NGO Draft Law shall apply to all foreign NGOs (i.e. non-profit and non-governmental social organizations legally established outside of the territory of China) carrying out activities in China. Based on the above, the Foreign NGO Draft Law provides the legal basis for various kinds of foreign NGOs to carry out activities in China.
Moreover, the Foreign Draft Law states that PRC regulators should facilitate foreign NGOs in their efforts to carry out activities in China (Art. 39), however, such activities should not:
- violate Chinese law;
- threaten China’s national security;
- harm China’s national interests or the legal rights of other groups and citizens; disrupt public order and morality; conduct or fund for-profit activities or political activities; and illegally conduct or fund religious activities (Art. 5).
Operation of Foreign NGOs in China
1. Representative offices and temporary activity permits
The Foreign NGO Draft Law specifies in Article 6 that there are only two ways for foreign NGOs to operate in China. Foreign NGOs may operate:
- through representative offices (“ROs”) registered in China (a foreign NGO may only establish one RO in China); or
- if no RO is registered, by obtaining a temporary activity permit (temporary activity permits can only be issued for activities whose duration does not exceed one year) (“Temporary Activity Permit”).
If a foreign NGO has established an RO in China, all of the activities of the foreign NGO must be run and managed through the RO (Art. 23). The duration of residence of the ROs shall not exceed five years. If an RO wishes to continue conducting activities upon expiration, it must reapply with the registration administration authority for registration with the professional supervisory unit’s consent 60 days before the expiration date of the existing duration of residence.
Oversight of foreign NGOs
Similar with the regulating mode for domestic NGOs, the Foreign NGO Draft Law primarily remains the “double approval system” for foreign NGOs conducting activities in China. The Foreign NGO Draft Law mandates that foreign NGOs carrying out activities in China be under the oversight of professional supervisory units (“PSUs”) and registration administrative authorities, i.e. the public security authorities (“PSAs”).
1. Responsibilities of PSUs (Art. 46)
- Foreign NGOs shall be under the oversight of PSUs that are presumably a government agency or another government-approved institution in the same field as the foreign NGO (Art. 45). PSUs shall be responsible for the following:
- providing advice on setting up an RO, changing registration status, carrying out temporary activities, and implementing new projects;
- providing advice on the annual inspections of the ROs of foreign NGOs;
- guiding and providing oversight to the ROs of foreign NGOs and foreign NGOs with Temporary Activity Permits to ensure that they carry out such activities legally; and
- assisting the PSAs (defined below) and other departments in investigating and punishing illegal activities by foreign NGOs and their ROs (Art. 46).
2.Responsibilities of PSAs (Art. 47)
Foreign NGOs shall also be under the oversight of public security authorities which have the following supervisory and management responsibilities:
- registering the ROs of foreign NGOs;
- issuing Temporary Activity Permits to foreign NGOs;
- carrying out annual inspections of the ROs of foreign NGOs; and
- overseeing activities carried out by foreign NGOs and their ROs and investigating and punishing illegal activities (Art. 47).
As alluded to above, before a foreign NGO can establish an RO, it must first obtain consents from both the relevant PSU and the PSAs. Moreover, the foreign NGOs must first consult with the relevant PSU before it can receive a Temporary Activity Permit from the PSAs.
Foreign NGO and RO reporting requirements
The ROs of foreign NGOs under the Foreign NGO Draft Law are subject to an annual inspection regime which has been adopted for representative offices of foreign foundations according to the Regulation for the Administration of Foundations and the relevant laws and regulations. Moreover, foreign NGOs or their ROs are also subject to the following additional reporting requirements outside of the annual inspection (Art. 24):
- ROs of foreign NGOs must report their activity plans for next year (including program implementation and the uses of funding) to the PSU (defined below) before November 30 of each year, and file their activity plans with the registration management authorities within 10 days after the PSU approves such activity plan; and
- foreign NGOs must file their registration certificates, their temporary activity permissions, and their activity descriptions with the PSAs (defined below) at the municipal level or above who are in charge of the district in which the project will be carried out.
Deregistration of ROs
Although ROs can be established under the Foreign NGO Draft Law, they can also be deregistered under certain circumstances. The following five circumstances may trigger deregistration of an RO of a foreign NGO (Art. 17):
- the overseas NGO closes its RO in China;
- the overseas NGO is terminated;
- the duration of residence of the RO expires and the RO fails to go through the reregistration procedure;
- the RO has its registration certificate cancelled or revoked according to law; or
- the RO is terminated for other reasons.
After an RO has been deregistered, any related outstanding issues and legal liabilities shall be borne by the foreign NGO.
RO personnel issues
The Foreign NGO Draft Law regulates a foreign NGO RO’s number of representatives, its recruitment of domestic employees, its number of foreign staff members, and the filing of information about its foreign staff members with the relevant government authorities.
Each RO must have one chief representative and up to three representatives (depending on the needs of the business) (Art. 34). Moreover, an RO must entrust a local foreign affairs service unit or other unit designated by the government to recruit staff members or volunteers in China (Art. 32). Foreign staff members must not exceed 50% of an RO’s total staff members and foreign staff members cannot concurrently work for an RO of another foreign NGO (Art. 35). An RO of a foreign NGO must also file information about its staff and personnel arrangements to its PSU and the registration management authorities (Art. 32).
The Foreign NGO Draft Law stipulates that foreign NGOs and their ROs shall not conduct fundraising activities or accept donations in China, unless otherwise directed by the State Council (Art. 26).
Funding for activities carried out by foreign NGOs include:
- overseas funding from legitimate sources;
- interest on deposits gained in Chinese bank accounts; and
- other funding legally acquired within China. Overseas NGOs shall not acquire or use funds other than those described above for their activities in China (Art. 26).
Moreover, an RO of a foreign NGO must use the bank account it filed with the registration management authorities to manage the funds it intends to use in China. Overseas NGOs that run temporary activities in China shall use their Chinese partner organization’s bank account to handle funds in China. An independent account record should be kept, and the money used as agreed upon (Art. 27). An overseas NGO with an RO in China must not receive or pay funds via other bank accounts. The use of funds is limited to the RO’s registered business scope (Art. 28).
An RO of an overseas NGO must also adopt Chinese accounting conventions and engage accountants legally certified in China to conduct financial accounting (Art. 29). The financial statements need to be audited by a Chinese accounting firm and made available to the public (Art. 29).
Penalties for violating the Foreign NGO Draft Law
Violations of the Foreign NGO Draft Law may incur penalties which include banning the RO, confiscating illegal assets and income, cancelling registrations, giving warnings, ordering to cease activities, etc. (Art. 56).
1. Common violations and penalties
Some of the ways that a foreign NGO can violate the Foreign NGO Draft Law include: carrying out activities in the name of foreign NGOs or the ROs of foreign NGOs without the requisite registrations or obtaining Temporary Activity Permits; continuing to carry out activities when the requisite registration certificates have expired, been suspended, or cancelled; continuing to carry out activities in China after the Temporary Activity Permit is no longer valid; and carrying out activities in the name of the branch offices of foreign NGOs in violation of the law (Art. 57).
2. Personality liability
Moreover, the Foreign NGO Draft Law imputes personal liability to the person directly responsible for violating its provisions. Such personal penalties may include warnings, detention for a period of less than 10 days, and a monetary fine whose value is determined by the type and severity of the violation (Art. 57 and Art. 58).
It is important that foreign NGOs with operations in China, or looking to initiate operations in China, pay close attention to developments in the Foreign NGO Draft Law. If the Foreign NGO Draft Law is officially promulgated, the primary administrative and supervisory authority for foreign NGOs will shift from the Ministry of Civil Affairs to the relevant PSA. One possible ramification of this change is that foreign NGOs that are already operating in China (i.e. representative offices of foreign foundations registered in accordance with the Regulation for the Administration of Foundations) may need to reapply with the relevant PSA for a new registration certificate or initiate other changes.
Furthermore, since the Foreign NGO Draft Law expands the scope of penalties (i.e. penalties can be administered on both a corporate and personal level for some violations) and increases the costs of noncompliance, foreign NGOs will need to remain in strict compliance with all of the provisions of the Foreign NGO Draft Law, in particular the requirements regarding information filing/reporting, personnel issues and financial governance. For example, foreign NGOs are well-advised to conduct a self-assessment of their financial affairs to ensure that they are in compliance with the Foreign NGO Draft Law’s many finance-related provisions. Care needs to be taken so that foreign NGO bank accounts are established and used properly and that foreign NGOs are not engaging in fundraising activities, accepting donations, or involved in other prohibited activities in China.
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