Chinese Government Passes Landmark Law Tightening Controls on Nonprofits

6 min

On April 28, 2016, China's national legislature passed a sweeping, controversial new law regulating the activities of foreign (non-Chinese) nonprofit, nongovernmental organizations' (NGOs) activities in China. The "Law on the Management of Foreign Nongovernmental Organization Activities inside Mainland China" (the Law) is set to be effective January 1, 2017 and, as enacted and understood, would impose significant administrative burdens and numerous restrictions on the activities of most US- and non-Chinese-based NGOs currently operating in China and those seeking to conduct activities in China.

Foreign NGOs around the world have been following China's draft legislation of the Law for a year. While the final law is narrower in scope than a prior draft released last year, implementation and enforcement of various provisions remains uncertain and are likely to be subject to administrative discretion. Of importance to any foreign NGO looking to conduct activities in China are the following elements of the Law: new State control and supervisory powers; complex registration and reporting requirements (including audited financial reports and plans on planned activities); and new restrictions on engaging in certain activities, such as recruiting, maintaining multiple offices, and funding political activities. Compliance with these requirements will require nonprofits that operate in China to make significant and, in some cases, challenging modifications to their governance and operational structures.

As adopted, the Law contains general and vague terms, resulting in national enforcement officials retaining discretion over its implementation. Before the Law takes effect, foreign NGOs should familiarize themselves with the Law, assess their current or planned activities in China, and determine whether further legal guidance may be necessary to ensure continued success of their operations under China's complex bureaucratic system.

Applicability and Scope of Permissible Activities and Operations

The Law broadly applies to any foreign NGO seeking to carry out activities within mainland China. The stated purpose of the Law is to "regulate and guide activities conducted by foreign NGOs within mainland China, safeguard their lawful rights and interests, and promote exchanges and cooperation."

  • NGOs Are Broadly Defined. The Law defines "foreign NGO" as any "not-for-profit, non-governmental social organizations lawfully established outside mainland China." Mainland China does not include Hong Kong, Macau, or Taiwan.
  • Potential Exemption for Certain Academic and Research Organizations. Additionally, the Law specifies that certain academic and research exchange programs working with Chinese counterpart institutions will follow existing regulations rather than the Law, but the identification of these exempt institutions remains unclear and will require further clarification from Chinese authorities.
  • Limited Scope of Authorized Activities. Be aware—the Law requires NGOs to limit their activities to certain "approved" topical areas that are "beneficial to the development of the social welfare in fields such as economics, education, science, culture, health, sports, and environmental protection, and for areas such as poverty relief and disaster relief."
  • Prohibited Activities. Unless special permission is granted, the Law generally prohibits foreign NGOs from recruiting members in China or establishing chapters, regions, or affiliates from within mainland China. Foreign NGOs also are prohibited from "engaging in or funding for-profit activities or political activities," and "illegally engaging in or funding religious activities" within mainland China.

Establishing Legal Domicile and Presence

The Law tightens supervisory requirements for conducting business in China on a temporary or permanent basis.

  • Documentation and Multiple Approvals. To complete the registration process, foreign NGOs must satisfy numerous approval and documentation requirements.
  • Registration Requirements. Consistent with current time-consuming hurdles to entering the Chinese market, any foreign NGO conducting activities in China must either obtain approval to establish a permanent representative office (RO) or carry out temporary activities under the supervision of a (local) government-affiliated sponsor for up to one year.
  • Penalties for Failing to Register. Foreign NGOs that have not properly registered or secured a host organization cannot conduct activities within China, and are subject to fines and detention.
  • Police Control and Oversight. Notably, in contrast to prior practice, the Law shifts authority to register and supervise foreign NGOs from the Ministry of Civil Affairs to the national Ministry of Public Security.

Operational Requirements

The Law imposes exacting, administratively burdensome operational requirements and requires the disclosure of sensitive personal and business information to the Chinese government.

  • No Branch Offices. The Law specifies that foreign NGOs may have only a RO in China unless a special exception is granted. This is similar to current practice and would require foreign NGOs that already have branch-type offices in China to shut them down.
  • Restrictions and Qualifications of Foreign Officers and Staff. The Law caps the number of employees that may work in a RO to four individuals. Each RO may have one chief representative and up to three other representatives as required for operations. Further, the Law contains hiring restrictions and qualifications on who may serve as a Foreign NGO's representative.
  • Stringent Financial Controls. The Law contains provisions which further specify and build on pre-existing restrictions regarding the source of funds used by foreign NGOs, maintenance of funds using Chinese bank accounts, and expatriation of such funds.
  • Activity and Financial Reporting. The Law imposes onerous reporting and auditing requirements. Foreign NGOs must submit annual reports to police authorities detailing sources of financing, spending activities, and changes in personnel for each RO in the past year.
  • Future Planning Reporting. The Law also requires foreign NGOs to submit in writing all "planned activities" for the coming year to Chinese government sponsors and the Ministry of Public Security.
  • Audit Requirement by Chinese Firm. Foreign NGOs must publicly disclose their financial records and have the financial records audited by certified Chinese accounting firms.

Enforcement Authorities

As currently understood, the Law provides that Foreign NGOs will be subject to control and oversight by various governmental authorities. However, primary enforcement authority has been shifted to police authorities, who appear to have been granted increased supervisory control over Foreign NGOs. Obviously, this is a notable development for any foreign NGO.

  • Broad Supervisory Powers. As drafted, the Law appears to grant broad discretionary powers for police to question and detain NGO workers, monitor their finances, regulate their work, shut down offices, and seize their property.
  • Vaguely Defined Offenses. The Law generally prohibits Foreign NGOs from carrying out activities that harm China's national unity, security, or ethnic unity or endanger its national interests. It also criminalizes "inciting resistance to the implementation of laws," as well as "creating rumors" or publicizing information that damages state security or national interests. These terms are not defined and invite the possibility of selective enforcement.
  • Proceed with Caution. Numerous critics have stated that the Law was adopted to preempt potential political threats against the ruling Communist Party as part of a broader crackdown on organizations promoting the growth of China's civil society. Regardless of the political undertones, now that the Law has been enacted, it is essential for foreign NGOs to be cautious about operations in China. This is true whether or not your NGO is involved in what may be considered politically sensitive activities because, until implemented, it is not clear what the breadth of the Law's interpretation by Chinese authorities will be.

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Although details on implementation of the Law have not yet been published, additional guidance from Chinese officials is reportedly forthcoming. In reviewing your "checklist" of considerations for new or continued activity in China, even if a one-time event, it is essential to ensure that you understand if and how the Law will affect your operations. NGOs should reexamine risks and take precautions regarding establishing a presence in China, partnering with existing organizations, moving funds in furtherance of the NGO's purpose, and any employees of the NGO operating in China from a legal, insurance and security risk perspective.

We will be closely monitoring the ongoing implementation of the Law in China, and will update you as developments warrant.