This is our translation of a talk given at the CDB Forum 2019, held in Beijing on the 11th of November. The speaker, Lu Xuan, is the chairman of Shanghai’s Legal Centre for NGO (上海复恩社会组织法律研究与服务中心). In this talk, entitled “the operational compliance of overseas NGOs under the new law”, Mr. Lu interprets the Overseas NGO Law from a legal perspective, covering some of the main points of confusion that can arise for international NGOs that want to work in China under the current legal framework.
I am very honoured to have received CDB’s invitation to come and share some of my views and experiences regarding the legal compliance of overseas NGOs since the implementation of the “The People’s Republic of China’s Law on the Management of the Activities of Overseas NGOs within Mainland China”.
First of all, let me go over some points of common knowledge regarding the law.
Firstly, from the very name of the “People’s Republic of China’s Law on the Management of the Activities of Overseas NGOs within Mainland China”, which from now I will call the Overseas NGO Law, we can see that it involves an issue regarding the applicability of overseas laws.
Those who have studied law all know of the class called “international private law”, which deals with the applicability of foreign civil and commercial law. Overseas NGOs are established overseas, and their legal identity applies the law of the place of registration. This point is very important. Determining whether an organization is or isn’t an NGO according to local law in the country or region of origin is crucial to determining whether the Overseas NGO Law is applicable or not. (note that the “Law of the Application of Law for Foreign related Civil Relations of the People’s Republic of China” states that “when it comes to the capacity for civil rights, civil behaviours, to organize a body, and the shareholder rights and duties of the legal person and its branch organizations, the laws of the place of registration apply”).
This issue of legal applicability will have an impact not only at the time of registration, but also during the NGO’s operations. For instance, which countries’ laws apply for donation contracts of overseas NGOs? Does China’s contract law and charitable donations law apply, or is it the law of the country or region of registration? If it is decided to use overseas law for the donation contract, in that case what about the articles contained in the Chinese law, which have to be followed regardless? A conflict of legal applicability will manifest itself. (Note: the “Law of the Application of Law for Foreign-related Civil Relations of the People’s Republic of China” states that “the parties may explicitly choose the laws applicable to foreign-related civil relations in accordance with the provisions of law. If there are mandatory provisions on foreign-related civil relations in the laws of the People’s Republic of China, these mandatory provisions shall directly apply. If the application of foreign laws will damage the social public interests of the People’s Republic of China, the laws of the People’s Republic of China shall apply.)
Secondly, during the process of implementation of the law, the release of the supporting measures and documents lagged behind, which is a common problem in Chinese legislation. Normally, the legislative process tends to focus on the broad picture and not the details, and the explanatory books and accompanying documents for the Overseas NGO Law were indeed rather few. Taking the Charity Law of the PRC (hereinafter referred to as the Charity Law) as an example, after the law was published in 2016, experts from the Committee on Legal Work of the Standing Committee of the NPC, the Supervisory and Judicial Affairs Committee of the NPC and the MCA took part in the drafting of no less than six recommendations, explanations and Q&As. Even though these weren’t “authoritative explanations”, but they did explain the meaning and applicability of every article of the law quite comprehensively from an academic angle. 20-30 accompanying regulations and documents were also released in succession. In the case of the Overseas NGO Law however, the supporting documents are still insufficient in number and not complete enough, so there is still much space to complement them, and furthermore there is still no explanatory book.
What’s more, I would suggest that Overseas NGOs that are not so familiar with the law need to correctly distinguish between the provisions of the law and policies and the actual requirements of the relevant organs. What is law, what is policy, and what are the requirements of the PSUs and the registration authorities? The law is fixed, while policies are standard documents, not laws, and they might offer some adjustments. Some overseas NGOs mistakenly take the requirements of the relevant government organs as legal requirements, when in fact this is not accurate, because these requirements may change with the passing of time, while the law is relatively unchangeable.
Thirdly, the development trends of the legal environment are different. The reason is very simple, the whole management and supervision under the Overseas NGO Law has become more standardized and strict, so this is also a good opportunity for everyone to really understand the law.
Fourthly, correctly understanding the involvement of overseas NGOs’ lawyers specialized in foreign-related cases will be useful to promote the law’s implementation. Why do you need lawyers specialized in foreign-related cases? Because the staff in overseas NGOs’ representative offices is usually quite limited, and lawyers are usually employed directly by the headquarters, and can communicate directly with them. The staff of the representative offices has limited powers, and even the chief representative’s decision-making powers may not be absolute, because a lot of authority remains with the headquarters. But in reality a lot of the time cooperation requires talking directly to the legal consultant or person responsible in the headquarters. According to the “Lawyer’s Law”, lawyers enjoy professional immunity, and the foreign clients place trust in them. Considering also that lawyers specialized in foreign cases are more familiar with foreign legal systems and cultures, and can handle communications more smoothly, if the lawyers discuss the legal problems directly with the decision-makers, the results will be more satisfactory.
Following are ten important rules regarding the legal compliance of overseas NGOs
First of all, when overseas NGOs carry out activities in Mainland China, they have to register a representative office in accordance with the law. If they haven’t, they need to file a temporary activity. If they have not fulfilled these two conditions, they must not overtly or covertly carry out any activities, or overtly or covertly entrust or fund any local organizations or person to carry out activities in Mainland China. Strictly speaking, it is illegal for an overseas NGOs that hasn’t registerd to do anything except for trying to register or file a temporary activity.
Secondly, overseas NGOs in Mainland China cannot carry out or fund for-profit, political or religious activities. What does non-profit mean? The Civil Code of 2017 once again makes it clear: a legal entity established for charity or other non-profit purposes, that does not redistribute profits to funders, founders or members, is defined as a non-profit legal entity. The question of whether something is for-profit is not related to whether you provide services to others and receive an income for it. Non-profit doesn’t mean that you are not allowed to charge a reasonable fee. In Chinese law, the understanding of “for-profit” is not directly related to whether you accept a fee and run operational activities. Whether something is for-profit depends on how you distribute the earnings – the assets and gains of non-profit organizations cannot be privately distributed or given as a bonus to any founder, funder or member. After an organization is closed down, the remaining assets should be turned over to other non-profit organizations of a similar nature, or used for social and charity purposes. This issue of being non-profit or not is connected to the legal compliance of the funding programs.
Thirdly, overseas NGOs must not establish branches within Mainland China, except if the State Council has other regulations in this regard.
Fourthly, overseas NGOs with representative offices or carrying out temporary activities should not develop memberships in Mainland China, except if the State Council has other regulations in this regard.
Fifth, overseas NGOs and their representative offices cannot fundraise in Mainland China. The charitable fundraising defined by the Charity Law includes public fundraising and also targeted fundraising. Thus the fundraising that is not allowed here includes not just public fundraising, but also targeted fundraising. Some Chinese foundations have also asked whether targeted fundraising has limits. According to the Charity Law it does, when done by charitable organizations it should be limited to specific targets, like the sponsors, the board of directors and the members. So are Chinese foundations not allowed to receive donations from companies or individuals? This should not be a problem, because giving donations （捐赠）and soliciting donations （募捐） do not have a one-to-one correspondence. There are often people who confuse soliciting donations (募捐) with fundraising (筹款 or 筹资), but in fact in China they are different concepts. For instance, when Chinese social organizations accept donations from society, it’s not necessarily from soliciting donations.
The Overseas NGO Law makes a lot of specific requirements on overseas NGOs with activities in China, including but not limited to the next five that I am about to go through.
Sixth, carry out activities according to the name, scope of work and location of activities specified during registration or filing. This may be the focal point of future administrative supervision and law enforcement.
Seventh, protect information transparency. This includes two aspects. The first is disclosure towards society according to the law, for instance publicizing the annual work plan. The second is accepting the supervision and management of the public security organs, relevant departments and PSUs, complying with the requirements of government departments and disclosing the relevant information to them.
Eighth, store all the material and accounting files of the activities. This point is worth stressing: the government learns about activities within China through its management of the representative offices and temporary activities of overseas NGOs, so all the accounting and program materials must be placed on file. (Note: as made clear by the “Civil non-profit organizations’ accounting system document N.1 (draft to solicit feedback)”, the representative offices of overseas NGOs should use this accounting system. In fact this is already being dong in practice.)
This is also very important, because when the relevant departments carry out inspections they want to see these materials. The program materials, accounting materials and the materials from the filing of temporary activities need to be appropriately taken care of. At the same time, changes in the staff also need to be filed with the government departments in a timely fashion.
Ninth, the annual work plan. Overseas NGOs’ representative offices have to report their activity plan for the following year, including the program implementation, use of funds and other content to the PSU before the 31st of December. Within ten days of the PSU agreeing, it has to be filed with the registration management authorities. If the activity plan needs to be altered because of special circumstances, then this should be filed timely with the registration management authorities.
Tenth, the annual inspection. Overseas NGOs’ representative offices should hand in their annual report for the previous year to their PSU by the 31st of January. After the PSU issues its comments, the report should be sent to the registration management authorities by the 31st of March to receive the annual inspection.
Apart from this, I would also like to interpret the concept within the law.
How should we understand “activities within China”? The first thing to ask regarding the law is what does “within China” and “activity” mean. The “Charity Law” has rules regarding the scope of charitable activities, and the overseas NGO law also has a scope: it lists eight categories, the economy, education, technology, culture, sports, environmental protection, poverty alleviation and disaster relief (in other words, overseas NGOs can carry out activities in these fields in accordance with this law that benefit the development of charity). If an overseas NGO or their Chinese partner are unsure whether they need to file a temporary activity for one of their own activities, they had best phone the local public security department’s overseas NGO management office or their PSU.
The overseas NGOs’ registration process and some points of notice: the law’s conditions for registering a representative office for an overseas NGO include the following: (1) it has been legally established overseas; (2) it can independently assume civil responsibility; (3) the mission and scope of work provided by the constitution are favourable for the development of charity; (4) it has existed overseas for over two years and has carried out actual activities; (5) other conditions stipulated in the laws and administrative regulations.
Notice “it has existed overseas for over two years and has carried out actual activities”. First of all, the NGO has to have been established overseas for at least two years, newly registered organizations won’t do; it also must have carried out actual activities, these two points are both important. Also, it must be an independent legal unit, so for instance branch offices of overseas NGOs registered in Hong Kong are definitely not entitled to register a representative office.
The filing of temporary activities: in actuality filing a temporary activity involves the approval of various departments and is quite rigorous. First of all, before running such an activity an overseas NGO must find a Chinese partner, and there are legal requirements regarding its identity. Since overseas NGOs can only carry out non-profit activities in China, only these four categories of organizations can be Chinese partners for temporary activities: national organs, people’s groups, public institutions and social organizations. Companies certainly can’t fulfil this role. How to carry out filings is also very important. Some universities have the right to approve activities related to international entities, and some Chinese partner units are social organizations that have a very close relationship with their PSU, so it’s easier for them to receive their approval. When the Chinese partner unit is a social organization, factors like the level of familiarity and trust of its PSU towards the activity will determine the difficulty of conducting the filing.
The professional supervisory unit: this is a topic that can’t be avoided. There are rules on what things have to be reported to the PSU for examination and approval, and what the PSU’s authority is. In sum, the PSU’s agreement has to be received as a preliminary before registration, but ultimately registrations and filings are completed with the PSB. The PSU is also responsible for modifications to the registration, providing comments on the annual work plan, providing guidance and supervising the legality of the overseas NGO’s activities. The administrative and law enforcement rights rest with the registration management authorities and the public security departments, while the PSU just has to assist public security to investigate unlawful behaviour by overseas NGOs and their representative offices. All of these are the scope of work of the PSUs.
Finally, it needs to be stressed that the only two ways for overseas NGOs to work in China is to register a representative office or file a temporary activity. There is no substitution. It is important to remember not to break the rules by transferring project funds directly to Chinese beneficiaries or partners. The law states clearly that overseas NGOs that establish a representative office have to go through a bank account that the office has filed with the registration management authorities in order to manage and distribute funds within China. Overseas NGOs filing temporary activities must make use of their Chinese partners’ bank accounts. A single bank account with dedicated funds must be used. In the case of bank accounts that do not fit the two rules above, overseas NGOs, Chinese partners and individuals must not disburse of receive funds for projects in China through any other method.
If overseas NGOs want to transfer project funds to China after registration or filing, this has to be either to the filed account of the representative office, or to the filed Chinese partner’s account.
Non-profit donors: why do some PSUs and registration management authorities require that funding organizations should be non-profits, and not companies (including so-called social enterprises). This is because there is currently no law defining social enterprises as non-profits, and companies are all registered with the Industry and Commerce Bureau and as for-profit entities are subjected to the “Company Law” and the “General Rules on Civil Affairs”. This is an important reason.
Activities in multiple locations: some representative offices have the whole country as their official “location of activities”, while some only cover a few provinces or a single province. According to the current law, if a representative office that only covers a single province wants to run activities in other areas, it can either expand its location of activities, or establish another office locally. For instance, if a representative office in Gansu that only has Gansu as its location of activities wants to run a project in Anhui, it can either expand its location of activities to include Gansu and Anhui, or it can establish an office in Anhui. Furthermore, the location of activities of two representative offices cannot overlap, so for instance it would not be allowed for an office in Anhui and an office in Shanghai to both have Jiangxi within their location of activities.
Overseas NGOs fundraising in Mainland China: from a legal perspective, the Charity Law stipulates that only charities that have the public fundraising certificate can publicly fundraise in China. Whether its targeted or public fundraising, only charity organizations can carry them out in China, and overseas NGOs cannot, with the Charity Law serving as the basis.
If overseas NGOs in China want to receive donations they must get the approval of the relevant departments, for instance the PSUs and the registration and management authorities. There are some technical problems here, for instance if it is not possible to issue a special receipt for a charitable donation, then the donation cannot be given. This is a problem with the supporting policies on the taxation of non-profits. If there is a foreign-invested enterprise in China that wishes to donate to a project in China, it is possible to find a way, for instance, the overseas NGO can cooperate with a Chinese foundation, and through project cooperation or dedicated funds, it can get the Chinese companies to donate the money directly to the Chinese foundation and use it for the project in China. This is possible according to current laws, there is no regulation forbidding it.
The scope of work: this point is very important. If there is really a necessity to carry out a new activity that goes beyond the official scope of work, I suggest going and changing the scope of work. It should definitely be avoided to engage in things that are not included in the scope of work, because if it carries out unregulated operations the organization will bear legal responsibility.
The use of names for the organization and activity: activities must be carried out under the name contained in the registration or filing. The name of the organization or activity must be kept the same. An overseas NGO may have different entities abroad, for instance one in Hong Kong and one in the US, but if it is the US entity that registered the representative office and the Hong Kong entity’s name is written in the activity documents, then that is illegal. You have to use the name under which the registration occurred, you can’t use a random name. What’s more, when carrying out a temporary activity you have to use the name found in the filing, including when doing promotion for it. You can’t change it at will, you have to use the same name.
The publicizing of information: currently, apart from the information on the representative office and the temporary activities, the main information that needs to be disclosed to society are the cancelling of registration, and the annual work report.
Translation by Gabriel Corsetti