Recorded Koehler Webinar: The New China Overseas NGO Law

The New China Overseas NGO Law

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In 2016, more than 7,000 non-governmental organizations (NGOs) operated in China. However, on January 1, 2017 the new Law on the Management of the Activities of Overseas Non-Governmental Organizations within Mainland China came into effect. This new law imposes more stringent regulations upon foreign NGOs registering and operating within Mainland China.

In this free presentation, we discuss these new requirements and how this will affect operations of foreign NGOs operating in Mainland China

Please join Berrin Öngün, senior consultant at Koehler Group, a CSC® company, and a global leader in business, legal, tax, and digital brand services, as we discuss several aspects of operating in China as an overseas NGO, including:

  • The legal context of the “Law on the Management of the Activities of Overseas NGOs within Mainland China”
  • The scope of permitted activities of overseas NGOs
  • Restrictions upon fundraising activities
  • Registration procedures and annual compliance obligations

In this interactive, one-hour webinar, participants will have the opportunity to ask questions and better understand the changes impacting foreign NGOs operating in Mainland China.

Webinar Transcript

Anu: Hello, everyone, and welcome to today's webinar, The New China Overseas NGO Law. My name is Anu Shan, and I will be your moderator. Joining us today is Berrin, a Senior Consultant at Koehler group. As a member of the Koehler Group's Business Advisory Department, Berrin counsels company from a wide range of industries seeking to expand or establish a legal presence in Asia. And with that, let's welcome Berrin.

Berrin: Thank you, Anu. Thank you everyone for joining, very nice to meet you today. Just a quick word about Koehler Group. Koehler Group is a subsidiary of CSC in Hong Kong. We are a professional advisory firm. And as you know, CSC's motto is, "We are the business behind business." So Koehler Group is a one-stop shop for your administrative needs in Greater China from incorporation to accounting, audit, tax filing, and so forth. This allows our clients to focus on their core business. So let's jump right into today's topic.

Today, I'd like to introduce you to the new "Law on Management of Foreign NGOs in China." So I'll get started with a bit of historical background on philanthropy in China, then we'll focus on this new law, what influence will it have on NGOs operating in China, and what are the main characteristics of this law. We'll focus a bit on the registration procedures.

There are two types of establishment for Foreign NGOs in China. One is a permanent establishment, which has a bit more involved registration process, or you can register for a temporary activities. For example, we just had the earthquake in Sichuan a couple of weeks ago. So if you were to provide disaster relief, that will be one option for you.

We'll have a look at current Foreign NGOs that are already registered under the new law, and at the so-called Supervisory Units. Supervisory Units are local institutions in China that will be your partners on the ground.

I'm wondering, what do you think about when you think about China? Perhaps you were thinking of recent history. For example, the Communist era and Mao Zedong, or the subsequent opening-up and economic boom where we have these incredibly large talents with more and more people that have a lot of money to give and to spend, or perhaps, you were thinking more of the ancient history and traditions such as the strong focus on community and family and the rich philosophic heritage in China.

China today has almost 1.4 billion inhabitants and a growing middle class. That means, they have more and more dispensable income that they can spend, of course, a lot of luxury goods that are very popular in China right now, but also that can be donated to charity. On the other hand, in large parts of China there is still a lot of poverty, and the rural areas are not as developed, so there's also a lot of opportunity to do good.

Philanthropy is very deeply rooted in Chinese history. I have one quote here from Lao Tzu who was a very famous Chinese philosopher in the 6th century B.C. And he said, "The sage does not hoard. The more he helps others, the more he benefits himself." So definitely in China, we had a long history of giving to charity of giving to others. However, during the Communist era, this all changed.

As you may know in 1949, the People's Republic of China was established by the communist party. And that was a very big break of course. Mao, the Communist leader of the country, introduced many measures that influenced all spheres of life and profoundly changed the course of history in China. And during the height of his communist regime, there was barely any room, really, for any charitable actions. On the one hand, from within the country because the country was in such great turmoil that people really didn't have the opportunity to help others, but the country was also shut off from the outside world. So outside organizations also didn't really have an opportunity to operate in China at the time.

During the following period in which China opened up again towards other countries and loosened the motto on communism a little bit, the NGOs were controlled by the government. So for example, we had organizations such as the Chinese Red Cross or the China Youth Development Foundation.

So in the '80s and '90s, giving happened more out of pressure and it was really restricted to these types of organizations. It was mostly a reflection of an individual's or a company's relationship with the states because the state may pressure you into donating your wealth or your company's assets to these organizations. Now, China is a more open society, and there's a very vibrant community with a bigger and bigger focus on giving, which would reflect more on an individual's or a company's relationship with a cause for the society at large.

On this slide, you can see the CAF World Giving Index of 2016. For those of you who don't know, the CAF is a British organization that aids charities, companies, and individuals to connect with each other and it facilitates the work of charitable organizations. The one thing that they do is they publish an annual World Giving Index report in which they scrutinize I think around 150 countries in regards to their giving.

So as you can see from this slide, China actually has a lot of catching up to do. When you look at the country, you see it's in the dark blue color whereas the U.S. is in that dark orange color. Meaning, the U.S. is a lot farther ahead than then China at this moment.

But when we look at the details on those two tables to the right, we can actually see some solid numbers in my opinion. So when we look at the donating money by country and ranking, we see that China is number four with 66 million people who gave money to a charitable cause in 2016. So this is actually just 5% of China's population. So it's a very low relative percentage, but it's actually an impressive number given that most countries have less than habitants than that.

When we look at the table that shows how many people were able to help a stranger, that was around 270 or 20%. When we compare the donations in the U.S. with the donations in China, we'll also see that there's a very big discrepancy. So in the USA, we had $374 billion donated according to giving USA, whereas in China in 2014, $16 billion were donated. So why is that?

One input comes from Jack Ma who was the founder of Alibaba, one of the richest men in the world, and I think the richest man in China period. And he said that donating money is more difficult in China than earning it. And he actually circumvented that problem by founding his own NGO. But why is donating money more difficult than earning it?

China has until now really lacked a legal framework governing both local and foreign NGOs. So I think we can all understand if someone gives part of their income to an organization, they want to know what happens to my money, who's handling it, is it being put to a good cause? So until now, the people in China felt they couldn't really know that it was being put to good use, so they're very reluctant to give. I think this new law will help with that and clear up a little bit the legal circumstances.

In the last 10 to 15 years, the civil society in China has been flourishing. We have around 7,000 born NGOs operating in China and around 675,000 local ones. I think that's around half of the one in the U.S., but of course the USA is one of the leading countries in that regard.

As mentioned, there's so far been a very murky legal framework for NGOs, especially foreign NGOs. They could register either as businesses, businesses in China or businesses in Hong Kong. They could register with the Ministry and Civil Affairs. Only a very small number of NGOs were able to do that, the really big brand names, a few of them did that, or they could not register at all. So as you can imagine, that didn't really inspire the trust of the people, and it also made working there more difficult. For example, it was very difficult to get a working visa foreign employee, foreign NGO because there was no organization that could officially sponsor it. So all those points will hopefully be cleared up with this new law.

So let's look at it a little bit. I want to approach this law from the big picture at first. As you may know in 2013, Xi Jinping was elected as president of the People's Republic. He's known for very strictly following the party line, and he's a very strict both in foreign political matters and domestic political matters.

One thing he's very famous for abroad and also domestically is his very tough hand on corruption. He's definitely somewhat of a hardliner. He is widening the influence of his party and exercising a lot of control over his people in some areas. For example, the restriction on the internet has been growing more and more. And his main goal is to make China a superpower on par with the U.S.

So in order to do that, he wants to curb what he calls foreign influence and halt the spread of harmful Western ideas. I think this is not unique to China. Similar moves have recently been made in, for example, Russia or Ethiopia. But in light of this, he has passed, or him and his government have passed a few laws recently that would curb the individual's freedom and exercise more control in the name of security such as the counterterrorism law, cyber security law, or also the charity law for local NGOs. So I think we need to consider this context when examining the measures foreign NGOs will now fall under.

Who is affected by this law? We have overseas foundations and social groups as well as think tanks. For example, the Paulson Institute founded by Henry Paulson, the former U.S. Treasury, has recently registered as an overseas NGO, or any other non-governmental nonprofit organization foreign outside of China. It's important to note that outside of China or foreign includes Taiwan, Hong Kong, and Macau by definition. So at this point, you were thinking, "No problem, I have a subsidiary in Hong Kong and I can just use that to enter China." I have to disappoint you, they would still be considered an overseas organization and have to go through the same process.

So the law endorses certain areas of activity. Those are the very politically correct areas that you could operate in. For example, the economy, science, poverty and disaster relief of course, sports, culture, education, health and environment. So in these areas, there's really not a lot of room for a controversy.

On the other hand, there are certain areas that foreign NGOs are explicitly prohibited from acting in such as a law and legal reform, human rights, any funding of for-profit entities, or any illegal religious activities. Here, I want to define what are illegal religious activities. Religious institutions can be active in such areas as poverty relief or disaster relief in which a lot of them have been classically active in, however, they cannot spread their faith within China or active churches. Basically, anything that can be considered a damage to national interest or national security is prohibited.

Here, I want to just interject with the little story about what can happen if you act in one of those areas, or what happens if you cross the Chinese government. Peter Dahlin is a Swedish activist, he was working for the Chinese Urgent Action Working Group. He's an activist for human rights. So he was in China until 2016. This law was passed on the 1st of January, 2017. So this is not a direct result of the law, but it is an example of what happens if you do something that the government is not very happy about.

This organization was trying to influence China through providing legal aid, raising media attention, and cooperation with international organizations such as the United Nations or the European Union. For example, he was handling a case of a journalist who was in prison for reporting on corruption in the Chinese Communist Party. Well, this is a very sensitive area. He was arrested in an operation to smash an illegal organization that sponsored activities jeopardizing China's national security. So I'm quoting here, of course. China accused him of receiving international aid.

So again, here, we have this element of we are scared of foreign influence, or we want to not give foreign governments the chance to influence our people. He was also accused of carrying out unregulated activities and fabricating information in his human rights report. So as a result, he was arrested. He was imprisoned in a so-called black prison, which is not an official prison.

He said he was subject to torture. And eventually, he had to confess on TV and to read a scripted confession, and apologize to the people of China. And lastly, he got deported from China. So it's very serious to breach these conditions, and I suggest to, like, very strictly follow the rules and only act on any endorsed area.

One important point to note is that this law actually does not explicitly allow you to fundraise in China. In fact, it says that fundraising is strictly prohibited via your own foreign NGO. You can use funds that are legally raised abroad and brought into China, or you can use the interest accumulated from funds in Chinese bank accounts. It is also against the law for any Chinese individual or institution accept funds from you that they know were raised illegally in China.

Just to illustrate how careful you have to be, I have a little story. I have a client who is a registered NGO in Hong Kong, and they have some local staff. Their local staff thought it would be a good idea to make a WeChat account for their NGO. So WeChat is a social media app that works sort of like Facebook, but has a lot more functions. So what you can do on there is actually you have a wallet and you can send money back and forth. So this can happen between friends, but you can also use it to pay for your bills, for example. And of course charities can also have accounts to accept money. However, this is not allowed under this new law.

So what the local staff of this organization did, they opened this WeChat account, they actually had to use someone's grandma's ID because they weren't able to register as an organization because they weren't registered in China, and they started soliciting and receiving donations via this account. And I guess the local staff didn't really think anything of it because the WeChat account is set up so quickly within just a few minutes. But this is very illegal, and it's really important that you train your staff not to do anything like that.

What's interesting is that in the Chinese wording of this article that prohibits fundraising, there's kind of a gray area. So it may be okay to receive donations that you didn't solicit. This is very typical for China. Usually, when a new law gets introduced in China it's very short. So I'm from Europe, I'm used to a lot longer laws with a lot of very specific language, and I guess it would be the same for the U.S.

In China, these laws are incredibly short. I think this foreign NGO law is just maybe four pages, so there's usually in the beginning a lot of room for interpretation. And I would advise you that you check with your local authorities if someone wants to donate money to you without you soliciting it, you may very well be allowed to do that.

Another option is achieving fundraising through local partners. So what you could do is cooperate with a local Chinese NGO and encourage any potential donors to donate to your Chinese partner instead of you, then your Chinese partner and your organization could use these funds to work on projects together. Again, this is something that you should check with the local authorities. There's always the situation in China that it depends on who you talk to, in which district you are, you may be allowed to do that, someone else may not allow you to do that, but it's definitely an option for some people.

I just want to walk you very quickly through the registration procedure, what it entails. It's very technical, and I'm happy to answer any specific questions in our later Q&A session, just keep this very brief. So you would register as a representative office of your overseas NGO. What's important is that your NGO has to be established in their home jurisdiction over more than two years.

You would then choose a PSU, which stands for Professional Supervisory Unit. This is basically a local institution that reviews and monitors your activities. There's actually a list published that you would choose your Supervisory Unit from. Once the Supervisory Unit accepts you as their protégé, you have 30 days to register with your PSA, which is your Public Security Agency, both on a local and a national level. Of course, you will notice here that you're being registered with the security agencies, and not with the Ministry of Civil Affairs, just a point to note.

On a side note, if your foreign NGO is terminated, your China representative office would also be closed. And as a foreign NGO, you can have many representative offices in different parts of China. So people have actually been doing that so far, say there's some Chamber of Commerce in Beijing and also one in Shanghai, that's no problem.

On this slide, I want to outline the rather extensive obligations that you have and the amount of info you have to provide to the Chinese government. As a foreign NGO, you are definitely under heightened scrutiny and the authorities want a lot of detailed information on your activities.

Every year, you have to file a so-called Annual Activity Plan. There, you would detail your project plans, use of funds, and other details. You have to file this with your Supervisory Unit every December 31st. So this is for the coming year.

And then you would also have to compile an annual work report. This work report has to include audited financial accounts. These have to be prepared by a Chinese firm. And you also have to include information on the situation of your activities, any changes on personal or your institutions, and so forth. And you have to file this for the past year on January 31st with your PSU, and in March with your PSA, the security organs.

Also important to note that any modification of your entity must be registered with the PSU and PSA. So as you can see from this slide, you cannot just change slightly, you know, register with something okayed, for example, environmental protection and then say, "Sweet. I'm in. I'm going to start doing human rights work." You are definitely monitored on a constant basis.

So let's have a look at the foreign NGOs registered under the new law. I just want to say that the little graph on the right is actually from June. So the numbers aren't accurate, but you can see that most of the foreign NGOs entering China so far come from the U.S. and Hong Kong. And most of them are situated in the larger cities like Shanghai, Beijing, Guangzhou, or in Yunnan, which is a province that has a long history of working with foreign NGOs. So they are a little more prepared there.

I think as of August 2017, it's around 130 foreign NGO representative offices registered. And, of course, it was first the heavyweights of the charity world, the big names such as Bill and Melinda Gates Foundation, WWF. But surprisingly, a lot of smaller Hong Kong-based organizations were also able to register really quickly. And what this says to me is that it's still important to have good relationships on the ground in China.

These people were able to register quickly because they were working in the area for a long time, they were speaking a common language, and they had good relationships with the authorities in their place of work. So they were able to get their applications through very quickly, whereas in the first half of the year, a lot of organizations were struggling to get registered. I think that's fairly typical for China. When we introduced SEPA, which is a partnership agreement between mainland China and Hong Kong, it was the same. The big companies were able to register first. And the smaller ones they, would be pushed to the side and in the beginning a little bit.

What's important is also that the law didn't come out until 1st of January this year, and it was announced I think six weeks before. So the Supervisory Units were still, to an extent, figuring out what does it entail to be a Supervisory Unit, and what procedures and processes do I have to establish, and how do I train my staff to do this? And the longer we have this law in place, the quicker it will be to get a registration.

Another option is to file for temporary activities. I think some of you may work in disaster relief. So if you would provide any temporary help in this area, for example, this is an option for you that's a lot less labor-intensive, and it can be used for any one-time event basically. So what you need is a local Chinese partner. This cannot be an individual or a company. It has to be one of the Chinese State Authorities, social or a public institution, or a mass organization. And these would act as your Supervisory Unit and file your activities.

So before beginning your activities, at least 15 days before, you would have to register like you were coming and provide some proof of funding, and details on your project. This would actually have to be done by your local partner, so the burden is on them to do that work. On the other hand, this is only a registration and there's no approval required. It is just a note basically to the government, "Hey, we're coming and we're doing this."

And within 30 days of finishing your activities on mainland China, you have to file an activity report and give them some information on what you were doing. These temporary activities are limited to a one-year period with a potential for renewal.

So once again, this is a situation where it pays to have a local professional who can help you with the right connections, can help you with the language because if you don't have those connections yourself, it will be difficult maybe to find a local partner who will bear the responsibility of being your partner and doing that registration for you.

Now I just want to give you a very quick overview on the Supervisory Units and how you can find the best Supervisory Unit for your NGO. So here, unfortunately, it's a little bit small, I hope you can see it. We have a list published by the Chinese authorities. And what you do is you look at your area of activities, and then little by little, they will tell you which is the appropriate Supervisory Unit.

So here in this example, we are an oceanic protection foundation. For example, we go to Environmental Protection, choose Oceanic Protection, for example, disaster prevention and relief. So then it tells us our PSU has to be the State Oceanic Administration of the People's Republic.

On the other hand, if you are active in biodiversity protection, you have a long list of PSUs to choose from. The feedback that we've gotten is that some potential PSUs, even those listed on this catalogue, have expressed some discomfort with assuming this rule in the beginning. This is because they also didn't have a clear instruction in the beginning of what is a PSU and what will I have to do. On the other hand, this is a requirement for them. So they have some sort of motivation or background to act as your PSU even if in the beginning, they may be a little reluctant.

We spoke to a foreign NGO who just managed to register in China, and they said that the local PSUs were apprehensive at first because they didn't know how to act as a PSU yet, but it seems to go faster and faster. And I think once those processes are in place and they have trained their stuff accordingly, and that should just, you know, work faster coming up.

So on to my conclusion, today I have mainly talked about the background of this law and what it takes to get the registration. However, you should keep in mind that getting registered successfully is not the end of your work, it's actually just the beginning. Compared to the previous situation where many foreign NGOs were able to fly under the radar to some extent, you will definitely have more obligations now, and it pays to work with someone who can keep track of the various deadlines, and the various requirements can inform you if there are any changes in the future to this law as is common, and who has experience working with local governments.

Some of the negatives of this law are that it outlines very specifically the dangers of working in prohibited fields. And as a consequence, some NGOs who are working in more sensitive areas may self-censor. This has also been the case before. For example, the American Bar Association, offered a book deal to what we would call a dissident to the Chinese government, and they pulled that one in the last minute because they said, "No, we cannot afford to ruin our relationship with the Chinese government like that."

However, some organizations chose to relocate after this new law was passed. Again, American Bar Association moved to Hong Kong from Beijing at the beginning of this year. You will also be subject to supervision through your Supervisory Units, which is, of course, it will be a lot of administrative work and additional requirements on your plate. And we do know through this law what the Chinese state will be capable of. For example, they can come into your premises at any time to perform an on-site inspection. They are able to freeze your assets and detain, or even expel you.

As I said before this was largely the same before this law was passed in the case with Peter Dahlin that I was talking about earlier. I think at the moment when we are working in a country such as China, we must accept that to some degree, at least for the time being, it's difficult or downright dangerous to operate in certain areas.

On the upside, you will work with a Supervisory Unit who is based in the same area of work as you are, so they may be able to provide you some guidance on working in China in this particular field. It will be easier to get work permits for expatriates, and it does provide a lot of transparency. And here, we are coming back to what Jack Ma said, the sentiment echoed by a lot of the Chinese people, that it was difficult to give money in China. I think we will see that more and more Chinese people trust them to the system.

The law also stipulates that there will be tax incentives for these kind of entities. It's unclear at the moment what this would be because it's not stated in the law. I guess the first financial year is not over yet, and I think they're working on it at the moment. And we will see next year what those tax incentives may be.

If your primary goal is to establish an outpost in Asia, then Hong Kong may be an option for you. As you may be aware, Hong Kong is largely separate from the mainland. It is called a special administrative region, so it does not follow the same laws or regulations as China, it has its own mini Constitution. You can set-up a charitable organization in Hong Kong, it's actually quite straightforward.

You can register if you provide poverty relief, education or religious activities anywhere in the world, or any other purpose that is beneficial to the Hong Kong community in particular. And this actually sounds pretty restricted, but, for example, most recently, I incorporated a charity that is in animal protection. So we're actually able to fit in a wide range of activities into this catalogue.

In order to register, you have to outline your upcoming activities. So for example, you have to provide some background information on your home NGO if you have any overseas establishment, and you have to submit an activity plan saying in the first one or two years of operating in Hong Kong, "This is what I'm planning to do," and then you can get your registration. I won't pretend it's super quick, sometimes there's a little bit of back and forth with the IRD in order to get the tax exemption. But once you have that, you're completely exempt from paying any taxes, and you have your first Asian presence. So for some of you, this may be a good option. That's it so far from . . .

Anu: Thank You, Berrin. That was . . .