On April 28, 2016, the Chinese People’s Congress passed the much-awaited Law on the Management of Foreign Non-Governmental Organizations’ Activities within Mainland China (the “Law”). The Law will take effect on January 1, 2017, after many years in the works. Many Chinese and international governmental and non-governmental groups have tried to provide their input during the long legislative process. So far, public reaction to the Law has been mixed and lukewarm.
For decades foreign non-governmental organizations (“NGOs”) have carried out activities in China. Some have done so with Chinese official sanction; others have operated in a legal “gray zone”.
The Law provides a framework (though less desirable for some) for the registration, supervision, funding, auditing and day-to-day operations of foreign NGOs in China.
Public security authorities as primary regulator
While domestic Chinese NGOs are regulated by the civil affairs authorities under the Civil Affairs Ministry (“CAA”), foreign NGOs are regulated by the public security authorities under the Public Security Ministry (“PSB”). This is not entirely a surprise as comparatively speaking, the PSB (as China’s de facto immigration authority) is more experienced in dealing with international organizations and individuals than the CAA. Foreseeably, the PSB will scramble to build an organizational infrastructure to help register and supervise foreign NGOs; during that process, some foreign NGOs may be well-positioned to provide input to the PSB on the organizational build-out. The PSB is authorized to investigate any conduct of foreign NGOs which is not in compliance with the Law, including conducting on-site inspection of a foreign NGO’s representative offices (“ROs”), questioning the individuals involved, removing or reproducing any relevant documents, and freezing any relevant property, bank accounts, facility or personal properties.
Foreign NGOs are not only subject to extensive supervision by the PSB (in relation to matters such as establishment, personnel recruitment and bank account management of their ROs), but also to substantive supervision by the relevant “departments in charge” (DIC), to be designated by the PSB in separate catalogues in relation to their operations (e.g., the review and approval for ROs’ activity plans for the following year, including project execution and use of funds, and review and approval of the annual report for the previous year). Compliance with this dual supervision regime may prove time-consuming and expensive.
Foreign NGOs are broadly defined as non-profit and non-governmental social organizations legally established outside of the territory of the PRC. Besides traditional forms of foundations, social groups and think tank organizations, nonprofit foreign universities, professional associations and interest groups are all subject to the Law, which surprised a lot of these groups. Foreign NGOs may operate in the PRC by establishing ROs. Foreign NGOs without registered ROs in the PRC are allowed to conduct “temporary activities” (generally for not more than one year) in partnership with a Chinese local NGO after completion of a filing with the local PSB by the Chinese partner.
Article 9 broadly prohibits foreign NGOs, which neither have ROs in the PRC nor have completed filings for “temporary activities”, from conducting operations (either directly or constructively) in the PRC, or from engaging or funding (either directly or constructively) any entities or individuals in the PRC to conduct the foreign NGOs’ operations in the PRC. Foreign NGOs which have used “captive” local entities to conduct operations should take notice of this broad prohibition and consider restructuring their operations to avoid any potential violations.
Restrictions on fundraising and use
The Law only permits limited sources of funding for foreign NGOs which (together with their ROs in the PRC) are prohibited from fundraising activities (including accepting donations) in the PRC. This means most of the funding to achieve foreign NGOs’ missions in the PRC may come from offshore sources, which may throw into doubt the long-term sustainability of some foreign NGOs in the PRC. Bank accounts of ROs must be registered with the PSB and ROs’ plans for use of funds for the following year must be approved by the DIC, which also reviews the actual use of funds for the previous year. For foreign NGOs without onshore ROs, funds for “temporary activities” are required to be managed through a separate bank account opened in the name of the relevant Chinese partners.
Given all these limitations for foreign NGOs under the Law, one wonders whether in many cases it might make more sense for foreign NGOs to conduct their operations as for-profit “businesses” in the PRC under the corporate legal regime, as long as such an approach does not run afoul of the above-mentioned Article 9.
Li Qiang is a partner of DLA Piper Shanghai Office
Sabrina Shi is an associate at O’Melveny & Myers Shanghai Office