Authors: Jing Yunfeng, Li Zhenghao, Li Huibin, Zhou Junxing, Dispute Resolution Group, King & Wood Mallesons 

On June 10, 2021, the Anti-Foreign Sanctions Law of the People’s Republic of China (hereinafter referred to as the “AFSL” or the “Law”) was officially promulgated with immediate effect. The enactment of the Law further provides China with strong legal underpinning and safeguard to counter foreign discriminatory restrictive measures. Meanwhile, against the background of an increasingly complex international environment, Chinese enterprises are facing challenges as to how to deal with foreign sanctions in accordance with the law while ensuring the security of overseas investments and the stability of international supply chains. This article will analyze the key issues at the practical level from the perspective of enterprises and put forward suggestions for compliance accordingly.

1. Legislative Background and Process

In recent years, the Chinese government has repeatedly announced the implementation of corresponding countermeasures against individuals and entities of the countries concerned (for details, please refer to our previous analysis China’s Countermeasures and Latest Legislative Developments). In accordance with the spirit of comprehensively promoting law-based governance, the Report on the Work of the Standing Committee of the National People’s Congress (hereinafter referred to as the “NPC”), which was reviewed and approved at the 4th Session of the 13th NPC, clearly states in its section of “Main Tasks for the Year Ahead” that, it is committed to strengthening the legal “toolbox”[1] for meeting challenges and preventing risks with a focus on countering foreign sanctions, interference, and long-arm jurisdiction.

Subsequently, the Legislative Affairs Committee of the Standing Committee of the NPC, in consultation with the central government and the relevant state departments, formulated the AFSL (Draft) (hereinafter referred to as the “Draft”). In late April 2021, the Draft went through the first reading by the 28th Session of the 13th NPC Standing Committee. The NPC Constitution and Law Committee further revised and improved the draft, and then submitted to the 29th Session of the 13th NPC Standing Committee a report on the results of deliberation concerning the Draft (hereinafter referred to as the “Deliberation Report”), along with an updated Draft for the second reading. On June 7, the first Plenary Meeting of the 29th Session of the 13th NPC Standing Committee heard the Deliberation Report. On June 10, the AFSL passed the vote. President Xi Jinping signed Presidential Decree No. 90 of the People’s Republic of China to promulgate the Law with immediate effect as of the date of promulgation. The chart below summarizes the legislative process of the AFSL.

2. Analysis and Interpretation of Key Provisions

The title of the Law includes three core keywords: “anti”, “foreign” and “sanctions”. As pointed out by the Person in charge of the Legal Affairs Committee of the Standing Committee of the NPC in his response to reporters’ questions, the title of the Law highlights the word “anti”. The main purpose of the legislation of the AFSL is to counteract, counterattack, and oppose the so-called “unilateral sanctions” imposed by foreign countries on China.

The word “foreign” refers to both foreign countries and may also target specific acts of foreign organizations or individuals. The word “sanction” is a general reference to the “discriminatory restrictive measures” referred to in the Law. With these keywords in mind, the following will analyze and interpret some of the main provisions of the AFSL.

(1) Circumstances under which countermeasures may be taken

Article 3 of the AFSL stipulates the main circumstances under which China may take countermeasures:

Article 3  The People’s Republic of China opposes hegemony and power politics and opposes any country’s interference in China’s internal affairs under any pretext and by any means.

Where foreign nations, in violation of international law and basic norms of international relations, to contain and suppress our nation under any kind of pretext or based on the laws of those nations, employ discriminatory restrictive measures against our nation’s citizens and organizations, interfering with our nation’s internal affairs, our nation has the right to employ corresponding countermeasures.

The circumstances listed in the second paragraph of Article 3 include several aspects, namely, foreign countries (1) violate international law and basic norms of international relations, (2) contain and suppress China, (3) take discriminatory restrictive measures against Chinese citizens and organizations, and (4) interfere in China’s internal affairs. Viewed together with the first paragraph of Article 3 (the Law opposes “hegemony and power politics” and “any country’s interference in China’s internal affairs under any pretext and by any means”), we understand that the relevant departments of China will make a comprehensive assessment in light of the circumstances listed in the second paragraph of Article 3, and decide whether to take corresponding countermeasures against the discriminatory restrictive measures of foreign countries.

In addition, Article 15 of the AFSL provides for other circumstances under which countermeasures may be taken:

Article 15  Where countermeasures need to be employed against foreign nations, organizations, or individuals that carry out, assist, or support conduct that endangers our nation’s sovereignty, security, or development interests, implementation is by reference to the relevant provisions of this Law.

It is worth noting that Article 15 not only targets specific acts of foreign countries but also may target specific acts of foreign organizations or individuals. In addition, this provision is aiming at acts that endanger China’s sovereignty, security and development interests, which are different from the “discriminatory restrictive measures” against Chinese citizens and organizations in Article 3. Therefore, Article 15 authorizes necessary countermeasures to be taken “by reference to the relevant provisions of this Law”, which expands the scope of application of countermeasures in terms of the subject and nature of the act.

(2) Targets that may subject to countermeasures

Article 4 of the AFSL establishes a mechanism called the “Countermeasure List”:

Article 4  The relevant departments of the State Council may decide to include individuals or organizations that directly or indirectly participated in the formulation, decision-making, or implementation of the discriminatory restrictive measures provided for in article 3 of this Law in the Countermeasure List.

According to Article 4, individuals and organizations directly or indirectly participating in the formulation, decision-making, or implementation of the discriminatory restrictive measures stipulated in Article 3 may be included in the Countermeasure List by the relevant departments of the State Council. The AFSL establishes the framework for this important regime, with specific implementation and enforcement related issues remaining to be clarified by supporting measures and law enforcement practices, including the following aspects:

  • Which departments are included in the “relevant departments of the State Council”? Viewed together with Article 9, the Ministry of Foreign Affairs (hereinafter referred to as the “MFA”) should be included. It remains to be clarified by supporting measures and law enforcement practices as to which other relevant departments of the State Council have the authority to decide to include individuals and organizations in the Countermeasure List.
  • What constitutes “direct or indirect participation”? This concept is literally broad in scope, but determining the level of participation that may lead to the risk of being included in the Countermeasures List in practice still requires further examination of law enforcement practice. For now, the scope of parties subject to countermeasures announced by the MFA in the recent period may shed some light to the question. (for details, please refer to our previous analysis China’s Countermeasures and Latest Legislative Developments.)
  • What is the scope of “individuals and organizations” that may be included in the countermeasures list? Viewed from its ordinary meaning, there is no limit on the scope of “individuals and organizations”. Judging from the legislative objective of “anti-foreign sanction”, it seems that “individuals and organizations” should mainly be those of the countries that adopt discriminatory restrictive measures. The scope of countermeasures announced by the MFA in the recent period can be of reference.

Article 5 of the AFSL further defines targets subject to countermeasures in addition to those contained in the “Countermeasures List”.

Article 5  In addition to the individuals and organizations included in the Countermeasure List in accordance with Article 4 of this Law, the relevant departments of the State Council may also decide to employ countermeasures against the following individuals and organizations:

  • Spouses and immediate family members of individuals included in the Countermeasure List;
  • Senior executives or actual controllers of organizations included in the Countermeasure List;
  • Organizations where individuals included in the Countermeasure List serve as senior executives; and
  • Organizations that are actually controlled by individuals and organizations included in the Countermeasure List or the formation and operation of which are participated in by the said individuals and organizations.

It is worth noting that Article 5 stipulates that the relevant departments of the State Council “may also decide” to take countermeasures against individuals and organizations with specific relations with individuals and organizations included in the Countermeasures List, implying that the latter are not automatically subject to countermeasures just because the former is already included in the countermeasures list, and that the specific target range should be decided by the decision of the relevant departments.

(3) Countermeasures

Article 6 of the AFSL stipulates the types of countermeasures:

Article 6  In accordance with their respective duties and division of labor, the relevant departments of the State Council may decide to employ one or more of the following measures against the individuals and organizations provided for in Articles 4 and 5 of this Law, based on the actual situation:

  • Refusal to issue visas, denial of entry, visa cancellation, and/or deportation;
  • Sealing, seizing, or freezing of movable property, immovable property, and all other types of property within the territory of our nation;
  • Prohibition or restriction on organizations and individuals within our nation’s territory to carry out relevant transactions, cooperation, and other activities with them;
  • Other necessary measures.

This provision lists a variety of countermeasures and “other necessary measures”, making it a catchall provision, whereby allowing the relevant departments to decide to adopt one or more measures according to the actual situation, combining clarity and flexibility. The measures listed in this provision are severe in nature and extent, including entry and exit restrictions, sealing, seizure and freezing of property, a prohibition against or restriction on transactions and cooperation, etc., which will cause substantial restrictions on the operation and other activities of the target subject to countermeasures in China.

Specifically, it remains to be further clarified by supporting measures and law enforcement practice as to which authorities will implement the countermeasures listed in items (1) and (2) of this provision, which acts are considered as “relevant transactions [and] cooperation” referred to in item (3), and the scope of the “other necessary measures” referred to in item (4).

(4) Procedures and mechanisms related to countermeasures

Articles 7 to 10 of the AFSL provide for the relevant procedures and mechanisms for countermeasures:

Article 7  Decisions made by the relevant departments of the State Council in accordance with the provisions of Articles 4 through 6 of this Law are final decisions.

Article 8  Where there are developments or changes in the circumstances on which countermeasures are based, the relevant departments of the State Council may suspend, modify, or cancel the countermeasures.

Article 9  The Ministry of Foreign Affairs or other relevant departments of the State Council is to issue orders announcing the determination, suspension, modification, or cancellation of Countermeasures List and countermeasures.

Article 10  The State is to set up a Work Coordination Mechanism on Countering Foreign Sanctions responsible for the overall coordination of related efforts.

The relevant departments of the State Council shall strengthen coordination, cooperation, and information sharing, and determine and implement related countermeasures in accordance with their respective duties and division of labor.

Among them, Article 7 provides that the decision of the relevant departments of the State Council on the Countermeasure List or countermeasures is final and has “the nature of a sovereign act of the state”[2], i.e. the relevant party cannot apply for administrative reconsideration or bring an administrative lawsuit.[3] Article 8 authorizes the relevant departments of the State Council to suspend, modify or cancel the relevant countermeasures. Article 9 further stipulates that the determination, suspension, modification, or cancellation of the Countermeasure List and countermeasures shall be promulgated by an order issued by the MFA or other relevant departments of the State Council. The three aforementioned provisions imply that the relevant departments of the State Council are leading the work related to the Countermeasure List and countermeasures, and the relevant parties’ participation and procedural rights are limited, but the Law also provides for transparency.

Article 10 stipulates that the state shall establish a Work Coordination Mechanism on Countering Foreign Sanctions, which shall be responsible for the overall coordination of the relevant work. Although the aforementioned Articles 4 to 9 stipulate that the relevant departments of the State Council have the right to decide on, suspend, modify or cancel the Countermeasure List and countermeasures, we understand that the relevant decisions may be coordinated by the  Work Coordination Mechanism on Countering Foreign Sanctions. However, the specific components and working mechanism of the coordination mechanism await further clarifications.

(5) Obligations and responsibilities of relevant parties

Articles 11, 12, and 14 of the AFSL provide for the obligations and responsibilities of the relevant parties under the Law:

Article 11  Organizations and individuals within the territory of our nation shall implement the countermeasures employed by the relevant departments of the State Council.

The relevant departments of the State Council shall deal with the organizations and individuals that violate the provisions of the preceding paragraph in accordance with law and restrict or prohibit them from conducting relevant activities.

Article 12  No organizations or individuals may implement or assist in the implementation of discriminatory restrictive measures employed by foreign nations against our nation’s citizens or organizations.

Where organizations and individuals violate the provisions of the preceding paragraph and infringe upon the lawful rights and interests of our nation’s citizens or organizations, our nation’s citizens and organizations may initiate litigation in the people’s courts, requesting that they stop the infringement and compensate for the losses.

Article 14  Any organizations or individuals who do not enforce or cooperate in implementing countermeasures are to be pursued for legal responsibilities according to the laws.

The following table summarizes the obligations and liabilities assumed by the relevant parties:

Parties under obligation Content of obligation Legal liability KWM Reading
Organizations and Individuals within China’s territory (Article 11) Organizations and individuals within the territory of our nation shall implement the countermeasures employed by the relevant departments of the State Council. The relevant departments of the State Council shall deal with the organizations and individuals that violate the provisions of the preceding paragraph in accordance with law and restrict or prohibit them from conducting relevant activities.

Ÿ   Organizations within China’s territory should include foreign-invested enterprises, representative offices of foreign organizations in China, etc.

Ÿ   For the term “restrict or prohibit them from conducting relevant activities”, the scope and connotation of “relevant activities” await further clarifications.
Any organization or individual No organizations or individuals may implement or assist in the implementation of discriminatory restrictive measures employed by foreign nations against our nation’s citizens or organizations. (Article 12) Chinese citizens and organizations may initiate litigation in the people’s courts, requesting that they stop the infringement and compensate for the losses.

Ÿ   The term “any organizations or individuals” should include both organizations and individuals in China and those outside China, such as subsidiaries of Chinese enterprises established outside China.

Ÿ   It remains to be clarified as to what legal responsibilities are included in “be pursued for legal responsibilities according to the laws”.  But we tend to believe that criminal liabilities are not included.
Any organizations or individuals who do not enforce or cooperate in implementing countermeasures are to be pursued for legal responsibilities according to the laws. (Article 14) Being pursued for legal responsibilities according to the laws

(6) Other countermeasures

Article 13 of the AFSL provides for connection and compatibility with other relevant regulations within the legal regimes:

Article 13: For conduct endangering our nation’s sovereignty, security, or development interests, other necessary countermeasures in addition to those provided for in this law may be provided for by related laws, administrative regulations, and departmental rules.

According to the explanation of the Legal Affairs Committee of the Standing Committee of the NPC, there has already been some similar regulations on countermeasures in China’s current legal regime.  The Law needs to provide for compatibility with those regulations and to leave room for future legislation to address similar situations. Similar regulations on countermeasures within the current body of law include Article 48 of the Export Control Law, the Provisions on the Unreliable Entity List, and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures. Under the authorization of this provision, the relevant departments of the State Council may, within the scope of their respective duties and authorities, and adopt other necessary countermeasures through departmental rules.

3. Frequent Q&As

Q1:  According to Article 4 of the Law, “individuals or organizations that directly or indirectly participated in the formulation, decision-making, or implementation of the discriminatory restrictive measures provided for in article 3 of this Law” may be included in the Countermeasure List, while the subjects that implement “discriminatory restrictive measures” in Article 3 are “foreign states”, that is, they are state acts. So, does this mean that the Countermeasure List is mainly targeted at foreign government organizations or foreign politicians, and therefore the actual impact of the AFSL on business entities may not be significant?

A1:  According to the provisions of Article 3 and Article 4, viewed together with the sanctions previously announced by the MFA, it is clear that some of the organizations and individuals on the Countermeasure List may include government organizations that interfere in China’s internal affairs and impose discriminatory restrictive measures under the pretext of human rights and Hong Kong or Xinjiang-related issues etc., and may also include politicians acting as the main promoters. We understand, however, that this does not mean that the AFSL will not have a substantial impact on business entities. First, individuals and organizations that “indirectly participated” in the “implementation” of discriminatory restrictive measures under Article 3 may also be included in the Countermeasure List. If the relevant discriminatory restrictive measures cover fields of trade and commerce, the business entities concerned may be affected. Second, Article 15 provides that “[w]here countermeasures need to be employed against foreign nations, organizations, or individuals that carry out, assist, or support conduct that endangers our nation’s sovereignty, security, or development interests, implementation is by reference to the relevant provisions of this Law.” Compared to the “state acts” mentioned in Article 3, the scope of “carry out, assist, or support conduct that endangers our nation’s sovereignty, security, or development interests” is broader, and such circumstances may occur in business activities. Therefore, we cannot exclude the risk of foreign business entities being included in the Countermeasure List or having countermeasures imposed on them due to their improper conduct in business activities.

Q2: What is the relationship between, one the one hand, the Countermeasure List, and on the other hand, the sanctions list previously published by the MFA, and the Unreliable Entity List published by the Ministry of Commerce (hereinafter referred to as the “MOFCOM”), respectively?

A2: Article 13 provides that “[f]or conduct endangering our nation’s sovereignty, security, or development interests, other necessary countermeasures in addition to those provided for in this law may be provided for by related laws, administrative regulations, and departmental rules.” This provision is considered to be an authorization for relevant government departments to issue rules of an anti-sanctions nature (such as the issuance by the MOFCOM of the Provisions on the Unreliable Entity List, and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures). This interpretation can also find support in the explanations given by the Legislative Affairs Committee of the NPC Standing Committee.

Therefore, we understand that the relevant departments of the State Council may conduct anti-sanctions legislations based on the above authorization and issue Countermeasure Lists (such as the MFA’s sanctions lists) or lists with anti-sanctions effects (such as the MOFCOM’s lists of unreliable entities, and the control list under the Export Control Law, etc.).

Q3: Article 12 stipulates that “[n]o organizations or individuals may implement or assist in the implementation of discriminatory restrictive measures employed by foreign nations against our nation’s citizens or organizations.” Does it mean that a Chinese domestic enterprise or a foreign-invested enterprise that refuses to deal with a Chinese enterprise on a “blacklist” issued by a foreign government for the reason of complying with foreign sanctions is in violation of the preceding provisions?

A3: First, as mentioned above, the scope of “discriminatory restrictive measures” has yet to be clarified, and it remains uncertain whether such measures necessarily cover all “blacklists” issued by foreign governments. However, we tend to make a comprehensive judgment focusing on the legislative purposes under Articles 1 to 3 of the Law and taking into account the international order, World Trade Organization rules, and international trade practices related to “fairness”. Second, we tend to believe that there should be a line between “implement[ing] or assist[ing] in the implementation of” the aforementioned “discriminatory restrictive measures” and “reasonably complying with the applicable foreign laws necessary for the conduct of business”. For example, if a Chinese company is placed on the sanctions list for violating the export control laws of a foreign country by unlawfully engaging in international trade activities related to nuclear materials or chemical weapons, and the companies placed on the list for the same reason are not limited to Chinese companies, then it should not be considered as constituting “discriminatory restrictive measures”.

Q4: Suppose a foreign country’s blacklisting of a Chinese state-owned Enterprise A is ultimately considered by the Chinese government as a “discriminatory restrictive measure”. However, another foreign-invested Enterprise B, based on its uniform global compliance policy required by its overseas group headquarters, insists on complying with the restrictions imposed by the list and unilaterally terminates its cooperation with Enterprise A. As such, can Enterprise A file a lawsuit in the People’s Court to request that Enterprise B cease infringement and compensate for damages?

A4: As a Chinese enterprise legal person, the foreign-invested Enterprise B is obligated to comply with the relevant obligations under paragraph 1 of Article 12 of the Law and shall not implement or assist in the implementation of the discriminatory restrictive measures taken by foreign states against Chinese citizens and organizations. Secondly, Enterprise B’s practice of prioritizing the global compliance policy of its overseas group company would not be a legitimate reason for its exemption from liability. Therefore, Enterprise A can file a lawsuit with the People’s Court according to the second paragraph of this provision, and request Enterprise B to cease infringement and resume cooperation or request it to compensate for the losses.

4. Practical Advice for Enterprises

(1) Keep track of China’s developments in anti-sanctions legislations.

Given that the AFSL features principles and frameworks, leaving ample room for subsequent similar legislative and enforcement practice by the relevant government departments. Accordingly, it is recommended that enterprises should keep track of the latest developments in China’s anti-sanctions legal regime, especially the specific implementation rules, other relevant laws and regulations, and representative cases of violations.

(2) Improve relevant contractual provisions in a timely manner.

With the promulgation of the AFSL, the legal battle between China and foreign countries is ever more intense, and a fundamental change can hardly be expected in a short time. Given this, it is suggested that enterprises should review without delay their existing transaction contracts or templates in accordance with the Law, and improve or adjust the content of relevant provisions, including but not limited to an additional agreement on the resolution of conflicts between Chinese and foreign laws.

(3) Modify compliance commitment documents.

Since the China-US trade friction in March 2018, Chinese companies have focused more on developing compliance systems related to the U.S. export control or economic sanctions in order to prevent the risks of being listed on the U.S. Entity List or Specially Designated Nationals And Blocked Person List (SDN). Therefore, made under such a system, the Management’s Statement of Compliance Commitment or the Compliance Commitment Letter/Information Letter and the Compliance Manual place more emphasis on the compliance with U.S. export controls and economic sanctions. However, now that the AFSL has come into force, we suggest that companies should quickly adjust the scope of their own or their business partners’ compliance commitments to a more comprehensive and neutral statement, and thoroughly review their existing foreign compliance management documents for any conflicts with the AFSL.

(4) Strengthen risk assessment and develop emergency plans.

Failure to plan ahead in the event of a conflict of laws between China and foreign countries may result in significant losses such as a major transaction being abandoned or an overseas investment unable to earn the expected profit. Therefore, we suggest that enterprises should strengthen their upfront risk assessment for major foreign projects to avoid the conflicts of laws between China and foreign countries. In addition, enterprises should also adopt a bottom-line mindset and re-evaluate compliance risks for major sensitive projects or high-risk overseas investments in progress or domestic projects that are highly dependent on international supply chains. Emergency plans should be established, including but not limited to negotiated withdrawal, and to minimize the legal risks and significant losses arising therefrom.

***

Thanks to contributions by interns Yan Lu & Yuan Xiaokun for their efforts to this article.

Jing Yunfeng

Partner

Corporate & Commercial Group

jingyunfeng@cn.kwm.com

Areas of Practice: export control and economic sanctions, China countermeasures and national security compliance, and customs and import & export, etc.

In recent years, Mr. Jing has provided various special legal services for multiple large central enterprises and well-known listed enterprises with respect to export control and economic sanctions compliance of China, United States, the European Union, Japan, South Korea and other major countries and regions. In the face of the China accelerating the legislation in foreign-related fields and further improving the system of foreign-related laws and regulations by centering on the areas of anti-sanctions, anti-interference, long-arm jurisdiction countermeasures, in recent years, Mr. Jing has provided legal services for many large state-owned enterprises and internationally well-known enterprises in compliance management related to China countermeasures and national security.

Li Zhenghao

Partner

Dispute Resolution Group

lizhenghao@cn.kwm.com

Areas of Practice：International trade law, commercial arbitration and litigation, and regulatory compliance legal services in the areas of technology, media and telecommunications (TMT)

Mr. Zhenghao LI is a partner in the Dispute Resolution Department of King & Wood Mallesons. He has extensive practical experience in the field of international trade and economic law, including WTO dispute settlement, international trade and economic treaty negotiations, and anti-dumping and countervailing duty investigations. Mr. Li has represented the Chinese government in nearly a dozen of WTO dispute settlement cases with China’s major trading partners such as the United States and the European Union. In addition, Mr. Li has in-depth knowledge and extensive practical experience in sanctions and anti-sanctions. Furthermore, Mr. Li has provided professional and practical legal advice to domestic and foreign clients on import licensing, technology export, customs and foreign exchange, and other related fields on a long-term basis. Prior to joining King & Wood Mallesons, Mr. Li worked at the Ministry of Commerce of China on trade remedies and WTO rules-related matters.

[1] The Response from the Person in charge of the Legal Affairs Committee of the Standing Committee of the NPC to reporters’ questions on the AFSL: http://www.npc.gov.cn//npc/kgfb/202106/90e92a915d5241468daa089a29cf08d3.shtml

[2] Id.

[3] This is consistent with the provisions of the PRC Administrative Litigation Law. Article 13(1) and (4) of the Administrative Litigation Law stipulates that the people’s courts shall not accept administrative litigation against “acts of the state such as national defense and diplomacy” or “administrative acts subject to the final decision of administrative agencies as provided by law”.