Rule of Law

China builds new framework governing civil society organizations

The National Law Review breaks down highlights from China’s controversial new Law on the Management of the Activities of Foreign Non-Governmental Organizations Within China into two parts: the first looks at Charity Law, the second, Foreign NGO Law.

By the National Law Review

Since the Xi administration’s pledge during the Fourth Plenum of the 18th Central Committee of the Chinese Communist Party in October 2014 to promote the rule of law (or, as the ambiguous language was interpreted by many, “rule by law”), China has issued a number of final and draft laws and regulations of significance to Chinese society and the foreign and foreign-invested entities that see China as an integral part of their own strategies. These laws and regulations include a new National Security Law, new Counter-Terrorism Law, draft Network Security Law, and draft Foreign Investment Law. These new laws and regulations may increase transparency and consistency in the regulation of some aspects of Chinese society and economy. However, through explicit language or broad or vague terms, many of the legislative highlights from the past 18 months provide a greater legal basis for significant government action and discretion.

New laws governing civil society in China are a case in point. During its meetings in March 2016, the National People’s Congress passed a new Charity Law that will go into effect on September 1, 2016 and govern all charity organizations in China. Thereafter, on April 28th, the Standing Committee of the National People’s Congress passed a controversial new Law on the Management of the Activities of Foreign Non-Governmental Organizations Within China (“Foreign NGO Law”).

This article examines the new Charity Law; a follow-on article will analyze the new Foreign NGO Law.

Charity Law

The stated goal of the new Charity Law is to build a single, comprehensive regime for the regulation and management of charity organizations in China. For decades, charities and, more broadly, civil society organizations have found themselves operating and fundraising in gray areas. The new law and subsequent implementing regulations will likely bring a (somewhat) greater measure of clarity to the regulatory environment. However, critics worry that more thorough management of civil society will provide the Chinese government with more tools for constraining civil society to achieve political goals.

Eleven years in the making, the Charity Law is China’s first comprehensive national-level legislation governing the charitable sector. The law’s provisions affect not only domestic and foreign non-profits, but also a wide range of companies and corporate social responsibility (CSR) initiatives. The law touches on a number of hot-button issues including direct registration, donation management, and transparency. Some highlights are as follows:

  • Broad scope. The first chapter of the law broadens the definition of what constitutes “charitable activities,” including within its scope “public interest activities voluntarily carried out…through the donation of property, the provision of services, or other means” related to poverty relief; environmental protection; care for the elderly and orphans; disaster relief; the development of science, education, culture, health, sports; and “other causes,” as well as “other public interest activities in accordance with this law.”Charitable organizations are defined as “legally established non-profit organizations that…aim to carry out charitable activities catering to society” and may include “foundations, social groups, social service organizations, and other forms of organization.”

  • Single Registration. Previously, charitable organizations needed to register both with the Ministry of Civil Affairs or relevant local counterpart thereof (“civil affairs department”) and also with a “professional supervisory unit” — in other words, a sponsoring government agency. Under the new law, Chinese charitable organizations no longer need to find a government sponsor. They will merely need to register with the appropriate civil affairs department. The Charity Law does not mention foreign charitable organizations, but under the new Foreign NGO Law — discussed in our next post in this two-part series — most foreign NGOs may only set up representative offices (or engage in temporary activities), which is handled by the Ministry of Public Security and its local counterparts rather than the civil affairs authorities.

  • Public Fundraising Rules. The new law attempts to provide more structure and clarity with respect to fundraising within China. While the new rules may represent an easing over the status quo in some respects, public fundraising in China will remain severely restricted and tightly managed by the government. While charities previously engaged in some online fundraising under the argument that online fundraising was not covered by previous rules (many of which were issued before online fundraising became mainstream), the new law removes any such ambiguity by explicitly covering fundraising over the Internet.

Only charitable organizations that have applied for and received public fundraising certificates may fundraise. Those without such qualifications may fundraise publicly only if they do so in cooperation with an entity approved for public fundraising.

Charitable organizations, which previously had limited and obscure paths to obtaining public fundraising status, may now apply for public fundraising certificates to the civil affairs department under which they are registered — after they have been operational for two years. The registering civil affairs department needs to deem the applicant organization as having sound internal governance and a good record of legal compliance. Certificates may be immediately granted to foundations and other social organizations that are permitted to fundraise under other laws and regulations. Once an organization receives a public fundraising certificate, each of its public fundraising activities must be filed with the registering civil affairs department. Online fundraising activities must be published on an online platform designated by civil affairs authorities.

Charitable organizations are encouraged to conduct on-site fundraising activities within the geographic area covered by the registering civil affairs department; if the fundraising must be conducted outside of those geographic boundaries, then the record filing must be made with the civil affairs department governing that location.

  • Limitations on Administrative Costs. Public foundations are required to keep their administrative costs at a level no greater than 10% of overall expenditures for a given year. The new law does not set out specific limits for the administrative costs of other charitable organizations, but it is possible that implementing regulations may do so.

  • Volunteer Management Rules. The new law sets out rules for the management of volunteers, requiring charitable organizations to conduct real-name registration of volunteers and to record information including the time and substance of volunteer activities performed by each volunteer and an evaluation of volunteers’ contributions.

  • Tax Incentives. Charitable organizations are to be given tax benefits, as are those who make charitable contributions. However, the law does not explain what exactly those tax benefits are. It also states that overseas donations are eligible for a reduction or exemption from import duties and import VAT “in accordance with the law.”

As is common in China’s unique legal system, the Charity Law provides high-level guidance.  The full impact of the law will not be known until regulating government agencies issue implementing regulations. Companies, organizations, and individuals — both domestic and foreign — with interests in China’s social sector should closely monitor these developments.

Part Two:

The Foreign NGO Law contains some specific requirements, but like many other high-level Chinese laws, it is relatively general in many respects (for example, with respect to what kinds of activities a representative office of a foreign NGO may conduct). We may get further texture in the coming months as the government is expected to release, first, a list of Frequently Asked Questions with accompanying answers, and then, later, implementing regulations or other forms of guidance. However, it is possible that some aspects will remain unclear, giving regulatory authorities greater discretion in the interpretation and application of the law’s provisions.

The Foreign NGO Law has generated significant criticism in the international community as critics argue that it could have a chilling effect on organizations engaging in or supporting social organizations in China. Chinese authorities, on the other hand, argue that the law lends clarity to a previously ambiguous operating environment for foreign NGOs and serves the government’s need to ensure national security and social stability. We examine some of the key features of the new law here:

  • Definition of “Foreign NGO.” The Foreign NGO Law defines “foreign NGOs” as “not-for-profit, non-governmental social organizations lawfully established outside of China, such as foundations, social groups, and think tanks.” Note that trade associations would likely fall within the jurisdiction of the law.

  • Unclear Treatment of Foreign Schools, Research/Academic Organizations, and Hospitals. In what appears to be a concession to organizations, such as foreign universities, that felt that the definition provided in a draft version of the law circulated last year was overbroad, Article 53 states that “exchanges or cooperation” with corresponding Chinese counterparts conducted by “foreign schools, hospitals, and natural sciences and engineering technology research institutions [and] academic organizations” are to be handled by laws and regulations specifically governing those activities (and presumably, subject to further clarification, do not require the registrations/filings contemplated under this new law). How broadly “exchanges or cooperation” is defined, and how activities outside the scope of “exchanges or cooperation” are to be treated, remains unclear. For example, in the case of universities, it is unclear how the authorities will view student recruiting, alumni engagement, executive education programs, and wholly foreign-owned enterprises (WFOEs) they may have established.

  • Leading Role of Ministry of Public Security. The government’s security concerns are clearly central to the new law, which places the lead responsibility for the registration and supervision of foreign NGOs with the Ministry of Public Security (“MPS”; note that references in this article to the Ministry of Public Security include its local counterparts), which manages the country’s police apparatus. Foreign NGOs have long had an uneasy relationship with the Ministry of Public Security, and are concerned that the new law provides a legal basis for Chinese security authorities to more actively intervene in their activities. The Chinese government acknowledges its security concerns with respect to foreign NGOs, but also claims that the choice of MPS was driven by a determination that it is the agency most competent in addressing issues related to foreigners in China.

  • Representative Offices. Foreign NGOs “that, outside of China, have existed for at least two years and have carried out substantial activities” may now register with MPS in order to set up representative offices in China (they may open multiple representative offices in different parts of the country). Representative offices do not have independent legal person status, meaning that legal responsibility is borne by the foreign NGO. Previously, there was no path for foreign NGOs (except foundations) to set up non-profit entities or offices in China. The only exception was in Yunnan Province.Foreign NGOs may not set up branches (or subsidiaries) in China, and they may not develop a membership consisting of Chinese citizens, unless otherwise prescribed by the State Council.

  • The new law does not explain what activities representative offices of foreign NGOs in China may carry out. For reference, regulations only permit the representative offices of foreign enterprises to engage in (i) market survey, exhibition, and publicity activities related to their products and services, and (ii) liaison activities.

  • Temporary Activities. The new law simplifies the process for foreign NGOs that seek to engage in activities in China without an established representative office. Foreign NGOs may engage in “temporary activities” by partnering with local entities, but such activities may not last for more than one year (unless a refiling is done). Foreign NGOs and partnering Chinese entities are required to file with the relevant public security authorities in advance, and they must report on the activities conducted and the use of funds within 30 days after the conclusion of the temporary activities.

  • Professional Supervisory Units. Before they can register for a representative office with the Ministry of Public Security, foreign NGOs must obtain the approval of the appropriate “professional supervisory unit.” Professional supervisory units are likely to be government agencies responsible for regulating various fields. For instance, an education-related organization would be supervised by the Ministry of Education or its local counterparts. MPS is to issue a catalog of designated professional supervisory units.

  • Professional supervisory units are responsible for reviewing the annual plans and reports (including financial reports audited by Chinese accounting firms) of representative offices under their scope of authority.

  • Broad MPS Enforcement Powers. While MPS previously wielded considerable powers, the new law provides a legal basis for the security authorities to exercise significant powers to discipline foreign NGOs engaging in activities that they (in their broad discretion) suspect or deem to be in violation of the Foreign NGO Law and other laws and regulations. When MPS suspects that a violation may have occurred, security authorities may compel the chief representative and other responsible individuals associated with a foreign NGO to be interviewed; collect any documents and materials related to the potentially infringing activities; freeze bank accounts; and/or seize facilities and other assets. When MPS deems that a violation has, in fact, occurred, the security authorities may issue a warning; deport non-citizens; and revoke the registration of a representative office or terminate temporary activities, and prohibit re-registration or further temporary activities in China for a period of five years. MPS may even add a foreign NGO to a black list, permanently prohibiting the NGO from re-registering or engaging in temporary activities in China. In addition to foreign NGOs deemed to be in violation of the Foreign NGO Law, culpable Chinese collaborators and beneficiaries may also be subject to sanctions under the law.

  • Permitted and Prohibited Activities. The new law provides that MPS will publish catalogues listing fields and types of projects in which foreign NGOs are welcome to engage. Foreign NGOs may carry out activities using their registered name and within their registered operational scope and geographic region.

However, foreign NGOs are prohibited from conducting activities that are for-profit, political, or religious in nature. They are also prohibited from engaging in activities that “endanger China’s national unity, security, or ethnic unity; or harm China’s national interests, the public interest, or the lawful rights and interests of citizens, legal persons, or other organizations.” Combined with the broad conception of “national security” in the new National Security Law passed last July, regulating authorities will likely wield (or continue to wield, but now with greater legal basis) significant discretion in determining which activities they find unacceptable.

  • Fundraising Restrictions. Foreign NGOs may not fundraise in China and may only operate bank accounts in the country that are filed with and can be supervised by MPS. Further, they must publicly disclose their audited financial accounting reports. Despite such restrictions, it appears that foreign NGOs may still partner with Chinese charity organizations whereby a Chinese organization may receive funds and assets raised through a foreign NGO’s efforts and then donate them to activities sponsored or led by the foreign NGO.

  • Limitations on Use of Bank Accounts. Foreign NGOs’ representative offices may only use bank accounts recorded with MPS for activities in China. Unregistered foreign NGOs engaging in temporary activities must use their Chinese partner entities’ bank accounts.

  • Extensive Reporting Requirements. Representative offices of foreign NGOs must submit an annual activity plan to their professional supervisory units for the following year by December 31 of each year (starting in 2017), and then subsequently file with MPS. Any adjustments to the plan require filing as well, and deviations from the plan can have serious consequences.Foreign NGOs’ representative offices must also “report information on employed personnel to the professional supervisory units and [public security authorities].”

  • Representative offices of Foreign NGOs must also submit annual work reports to their professional supervisory units by January 31 of each year, and then to MPS by March 31. These annual work reports must include financial accounting reports audited by Chinese accounting firms together with information on activities, personnel, and organizational changes. Annual work reports are to be published online on a unified MPS website.

  • Employment Procedures. The law states that the chief representative and other foreign representatives who are employees of foreign NGO representative offices are eligible for employment and other work formalities (e.g., work permits).

  • Rumors and Harmful Information. Among other violations of the Foreign NGO Law and other laws and regulations, the law states that foreign NGOs may have their registration or temporary activities canceled, and even responsible personnel detained, for, among other things, “creating rumors, engaging in defamation, or publishing or disseminating other harmful information that endangers state security or damages the national interest.”

While the law may indeed bring greater clarity to the legal and regulatory environment for foreign NGO activities in China, the contours of that environment may be less friendly to foreign NGOs than many in the international community had hoped. As with the Charity Law, much will depend on how the government implements the provisions of this law through implementing regulations, guidance, and practice.

Shirleen Hong, Ning Lu, and Eric Carlson of Covington & Burling LLP assisted with the research and preparation of this article. The unofficial English translation of the law used here is based on that provided by here.

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