Authors: Wang Feng, Zhou Xin, Luan Jianqi, Dai Menghao, Regulatory & Compliance Group, King & Wood Mallesons
The Anti-Foreign Sanctions Law of the People’s Republic of China (the “Anti-Foreign Sanctions Law”), officially announced and taking effect on 10 June 2021, has aroused wide attention both at home and abroad for its innovative regulatory design despite of its condensed form of only 16 articles. Many enterprises are also actively discussing its possible impact on multinationals and international economic and trade activities.
The Anti-Foreign Sanctions Law introduced under the current special business environment has some features deserving our attention. In this article, we will share with you our preliminary thoughts based on relevant overseas laws, regulations and precedents. When making business decisions and determining trading patterns, enterprises need to adopt a prudent approach by taking into account their own internal control requirements and actual operations. Enterprises are not recommended to simply follow the ideas discussed in this article, but analyze relevant issues based on their realities.
1. What Is the Nature of the Anti-Foreign Sanctions Law?
This is the most concerned issue for many enterprises after the promulgation of the Anti-Foreign Sanctions Law. Some have compared the Anti-Foreign Sanctions Law to the EU Blocking Statutes. After carefully studying the relevant provisions, however, we found that there are distinct differences between the two laws. The main purpose of the Blocking Statutes is to block EU entities from complying with obligations provided by sanctions with extra-territorial jurisdiction of overseas countries and regions. Such obligations are imposed on entities within the EU. In contrast, among all the 16 articles of the Anti-Foreign Sanctions Law, only Article 12 provides for the blocking obligation, with all the remaining articles focusing on the contents, standards, legal liabilities and other matters of countermeasures and the counter-sanction list. Countermeasures such as the visa ban, assets freeze, and trade enjoinder provided in Article 6 of the Anti-Foreign Sanctions Law are basically the same with the relevant sanctions imposed by the Department of Treasury and the Department of State of the United States. Meanwhile, the provision in Article 5 that the related parties to entities subject to countermeasures may be included in the counter-sanction list mirrors the “50% rule” commonly adopted by the US sanctions law. In addition, when comparing the relevant provisions of the Anti-Foreign Sanctions Law on the counter-sanction list with those on the entity list under the US Export Administration Regulations (the “EAR”), we also find similarities as follows:
|Counter-sanction list under the Anti-Foreign Sanctions Law||Entity list under the EAR|
The relevant departments of the State Council work together, directly or indirectly, to formulate the counter-sanction list
The End-user Review Committee (the “ERC”) composed of the Department of Commerce, the Department of State, the Department of Defense and the Department of Energy in conjunction with the Department of Treasury is responsible for formulating the entity list.
|Standards for inclusion||
1） Overseas individuals and organisations that directly or indirectly participate in the formulation, decision-making and implementation of acts that violate international law and basic norms of international relations, contain and suppress China under various excuses or in accordance with their own laws, take discriminatory restrictive measures against Chinese citizens and organisations, and interfere in China’s internal affairs;
2） Foreign countries, organisations or individuals implement, facilitate, and support acts that endanger China’s sovereignty, security, and development interests
|Entities outside the US that endanger the US national security and diplomatic interests|
|Effect||The decision reflected on the list is final||Decisions on the inclusion and removal of entities in or from the entity list are non-appealable|
It is quite clear that the Anti-Foreign Sanctions Law focuses on “counteracting” rather than “blocking”, and the contents thereof are in obvious equivalence with overseas restrictive measures against China.
In particular, pursuant to Articles 13 and 15 of the Anti-Foreign Sanctions Law, and in combination with the Notes of the Legislative Affairs Commission of the NPC Standing Committee on the Anti-Foreign Sanctions Law (Draft) of the People’s Republic of China, [] the countermeasures under the Anti-Foreign Sanctions Law are not only against foreign restrictive measures targeting China. China may also impose restrictive measures on individuals and subjects who implement, facilitate and support acts overseas that endanger China’s national sovereignty, security and development interests. If the relevant business activities of overseas enterprises are recognized as endangering China’s national sovereignty and development interests, such as the previous acts of some US enterprises involved in arms sales to Taiwan region which were sanctioned by the Ministry of Foreign Affairs of the People’s Republic of China [], such enterprises may be included into China’s counter-sanction list upon the implementation of the Anti-Foreign Sanctions Law. Therefore, to some extent, the Anti-Foreign Sanctions Law is not so much a Chinese version of the Blocking Statutes as a sanction law with Chinese characteristics that is in direct opposition to relevant overseas laws and regulations.
In addition, it should be noted that even in terms of the scope of blocking, since the Anti-Foreign Sanctions Law targets restrictive measures against Chinese subjects, its blocking scope is different from that of China’s Measures for Blocking Improper Extra-territorial Application of Foreign Laws and Measures (the “Blocking Measures”) and the EU Blocking Statutes. Some of the provisions of the Blocking Measures and the Blocking Statues both aim to prohibit or restrict domestic entities from conducting transactions with third countries, such as some extra-territorial sanctions laws and regulations with secondary sanctions effect. Such extra-territorial sanctions laws and regulations, however, are not subject to the Anti-Foreign Sanctions Law as long as the target of direct sanctions is not a Chinese subject. Whether they will be blocked depends on the subsequent release of relevant bans under the Blocking Measures.
2. What Are the Discriminatory Restrictive Measures in the Anti-Foreign Sanctions Law?
“Discriminatory restrictive measures” is a key word in the Anti-Foreign Sanctions Law, which determines the trigger events of the counter-sanction list and the blocking obligations that entities need to comply with. How to construe the discriminatory restrictive measures in the context of the Anti-Foreign Sanctions Law is also one of the focuses at present. From the wording of Article 3 of the Anti-Foreign Sanctions Law, the discriminatory restrictive measures thereunder shall meet the following criteria:
- Such restrictive measures should be aimed at Chinese citizens and organisations; and
- Such restrictive measures are aimed at containing, suppressing and interfering in China’s internal affairs and are discriminatory against Chinese individuals and organisations;
According to the above definition, a series of sanctions issued by the US since last year against Hong Kong SAR, Xinjiang province and Chinese Military-Industrial Complex Companies (CMIC) conform to the above standards in terms of legislative purpose and content. Nevertheless, since the expression used in the Anti-Foreign Sanctions Law is “restrictive measures”, it is also possible to include restrictive measures such as export control and customs withholding orders. It will be difficult, however, to confirm that the restrictive measures with regard to export control and customs withholding orders are “discriminatory” compared with sanctions with relatively clear objectives. Taking the entity list under the US export control as an example, under the principle of “endangering US national security and diplomatic interests”, relevant US government authorities have certain discretion in disposal, which leads to various specific reasons for inclusion in the entity list. With respect to the nearly 400 Chinese entities currently on the list, they can be categorized as enterprises:
- suspected to violate the US embargo on specific countries;
- suspected to support the ultimate military use in China;
- engaging in South China Sea development activities;
- suspected to steal trade secrets and infringe upon intellectual property rights;
- exporting high-performance monitoring technology and suspected to violate human rights;
- suspected to engage in forced labor activities in Xinjiang province and violate human rights; and
- suspected to provide low-quality security inspection equipment which poses a threat to non-proliferation;
Then, under the Anti-Foreign Sanctions Law, should we take the entire entity list as a discriminatory restrictive measure, or should we examine the reasons for each case where the Chinese enterprise is included and make separate judgment? If such case-specific judgment method is adopted, what are the specific standards and procedures? These are not specified in the Anti-Foreign Sanctions Law, which are expected to be further clarified in future legislation.
In addition, for Chinese entities subject to restrictive measures for violating foreign sanctions against third countries, whether such restrictive measures can be relieved by the Anti-Foreign Sanctions Law or the Blocking Measures solely remains a question to be clarified in the future. In particular, considering the differences in legislative hierarchy and provisions between the Anti-Foreign Sanctions Law and the Blocking Measures, the legal consequences under these two laws may be quite different. We also look forward to solutions to this issue in future judicial and legislative practice.
3. How Should Chinese Subjects Fulfill Their Obligations to Implement Countermeasures?
Article 11 of the Anti-Foreign Sanctions Law prescribes in principle that all Chinese subjects shall have the obligation to implement countermeasures. Nevertheless, as to the implementation of countermeasures, Article 6 of the Anti-Foreign Sanctions Law only generally provides that the countermeasures include:
- Refusing to issue visas, banning entry into China, invalidating visas, and deportation;
- Sealing up, seizing and freezing movable, immovable and other types of property in China;
- Prohibiting or restricting organisations and individuals within the territory of China from engaging in related transactions, cooperation and other activities; and
- Other necessary measures.
Given the complexity of international trade and business cooperation, the following cooperation and transaction scenarios may exist under the above countermeasures:
- Any subject within the territory of China which knows or should have known that the end user is the subject in the counter-sanction list, trades with an overseas third party and transfers items and achievements to the subject in the counter-sanction list through the overseas third party;
- Any subject in the counter-sanction list obtains items and achievements from the subject within the territory of China through an overseas third party in the form of a fictitious end user;
- An overseas financial institution provides financing and other services for the illegal transactions conducted by the subjects in the counter-sanction list;
- An overseas consulting agency designs trading schemes for the subjects in the counter-sanction list to evade China’s countermeasures; and
- A domestic law firm advises the subjects in the counter-sanction list on the impact of countermeasures counter-sanction list and compliance;
We believe that the above scenarios are also frequently bumped into by many enterprises in their daily operation. Under these circumstances, however, whether and what kind of liabilities should be undertaken by the China’s domestic subjects, overseas third parties, overseas financial institutions, consulting agencies and domestic law firms remain to be clarified in future legislation.
The US sanctions law generally prohibits transactions with sanctioned parties and any facilitation provided to such transactions, as well as any acts intended to evade the transactions prohibited by sanctions. As to facilitation provided to prohibited transactions, the US has adopted an expansionist attitude – a series of facilitation and services provided for regulated transactions may be defined as facilitation provided to prohibited acts. For example, facilitation listed in the former Sudanese Sanctions Regulations includes:
- Providing commercial and legal advisory services that benefit Sudan;
- Developing investment and trading plans in Sudan;
- Designing transaction framework related to Sudan transaction;
- Transporting Sudanese goods;
- Financing Sudan; and
- Providing insurance for Sudan.
Meanwhile, although sanctioned transactions are generally prohibited, the US also issues specific licenses for certain business, which enables US entities to deal with sanctioned entities under special circumstances. For example, the Guidance on the Provision of Certain Services Relating to the Requirements of US Sanctions Laws [] issued by the Office of Foreign Assets Control of the Department of Treasury (the “OFAC”) on 12 January 2017 allows law firms and consulting agencies to provide compliance analysis on specific transactions for sanctioned parties; and the Guidance on the Release of Limited Amounts of Blocked Funds for Payment of Legal Fees and Costs Incurred in Challenging the Blocking of US Persons in Administrative or Civil Proceedings [] issued on 22 July 2010 provides that the sanctioned parties are allowed to use frozen funds to pay legal fees under certain circumstances with the OFAC approval.
In future legislation, China may learn from overseas experience to further clarify the scope of application of the ban, so as to provide clear guidance to domestic subjects. It may also combine the cross-department working mechanism in Article 10 of the Anti-Foreign Sanctions Law with the regulatory requirements of the Export Control Law, Foreign Exchange Control Regulations and other relevant rules to strengthen cross-department law enforcement. In addition, it may explore the possibility of granting licenses and exemptions as opposed to the bans to maintain the flexibility of relevant rules.
4. How Do Companies Fulfil Their Blocking Obligations Under the Anti-Foreign Sanctions Law?
Article 12 of the Anti-Foreign Sanctions Law also specifies the blocking obligation under the Law with respect to extra-territorial discriminatory restrictive measures involving China. It should be noted that, however, unlike the blocking obligations under the US anti-boycott rules and the EU Blocking Statutes, which are imposed on domestic subjects, the blocking obligations under the Anti-Foreign Sanctions Law are applicable not only to companies within the territory of China, but also to foreign entities, which are also prohibited from implementing or assisting in the implementation of relevant discriminatory restrictive measures. In this regard, companies located outside mainland China, including those established in Hong Kong SAR, Macau SAR and Taiwan region, should pay due attention to this.
Although Article 12 provides that no one may implement or assist in the implementation of extra-territorial discriminatory restrictive measures, the following issues in connection with the determination criteria for the implementation and assistance in implementation, and subsequent reliefs remain to be further clarified:
- How to determine that a relevant subject has implemented or assisted in the implementation of discriminatory restrictive measures?
- How to deal with the judicial relief under Article 12 of the Anti-Foreign Sanctions Law?
- Will the implementation or assistance in the implementation of discriminatory restrictive measures be considered as an imposition of restrictive measures as provided in Article 4 of the Anti-Foreign Sanctions Law which may lead to the inclusion of the relevant subject in the counter-sanction list?
- Can relevant entities be exempted from blocking obligations?
Firstly, the current Anti-Foreign Sanctions Law does not specify the determination criteria for implementation or assistance in implementation of relevant restrictive measures. We are still wondering if relevant acts fall into the scope of the implementation or assistance in implementation, including merely providing in a contract that the restrictive provisions of other countries are to be complied with; suspending a transaction by a counterparty on other grounds after the implementation of discriminatory restrictive measures of other countries; and conducting compliance screening and due diligence based on the regulatory requirements for complying with discriminatory restrictive measures adopted by other countries. These are issues that often arise in the day-to-day operations of companies which require clear instructions and answers in the future.
From the relevant provisions under the US anti-boycott rules, taking or knowingly agreeing to take certain specified actions with intent to comply with, further or support relevant sanctions and boycott activities are prohibited under EAR Sections 760.1(e) and 760.2, including:
- Contractually agreeing to abide by the sanctions and boycotts rules of the boycotting party;
- Taking the boycott request of the boycotting party as an important consideration for business decision-making;
- Accepting the boycott clause contained in a letter of credit (L/C) and using it as a condition for performance in L/C transactions;
- Providing or agreeing to provide the boycotting party with information relating to its boycott and the specific boycotted party, for example, disclosing information about a potential boycotted party to the boycotting party by answering questionnaires, providing basic employee information, etc.; and
- Providing or agreeing to provide the boycotting party with information on business dealings involving the boycotted country or blacklisted entity, for example, complying with the boycotting party’s request to disclose business presence in the boycotted country, business dealings with the blacklisted entity in tender information.
Is it feasible to draw on the criteria under the US anti-boycott rules in establishing the criteria for implementation or assistance in implementation of relevant restrictive measures under the Anti-Foreign Sanctions Law? This needs prudent considerations based on our realities and the subsequent impact of enforcement.
Secondly, Article 12 of the Anti-Foreign Sanctions Law provides that Chinese subjects may seek judicial reliefs when a third party implements or assists in the implementation of discriminatory restrictive measures. In practice, however, a number of challenges may arise, such as:
- How a Chinese court judgment in favour of Chinese entities can be enforced abroad;
- Whether expected loss of profit can be claimed in court where there is no direct loss (e.g. where the counterparty simply refuses to deal); and
- Whether the arbitral award will be recognised by the relevant domestic court when the foreign party initiates a separate arbitration pursuant to a contract and applies for enforcement of the arbitral award in China, if the parties have agreed to resolve the dispute by arbitration under the original contract.
Furthermore, given the strict enforcement measures in related areas in some foreign countries, such as the US, many companies may choose to implement the restrictive measures against China and thus face partial civil damages instead of running counter to the strict provisions of the foreign countries which may lead to heavier penalty. Therefore, such a result also undermines the blocking obligation under the Anti-Foreign Sanctions Law. If any violation of the blocking obligation is deemed as the implementation of restrictive measures and will lead to the inclusion in the counter-sanction list, the consequences could include cutting off all transactions with China, or even freezing the assets of relevant subject in China (including equity interests in subsidiaries). Such a move, while putting further pressure on the companies concerned, may also affect their confidence and sense of security in China’s supply chain and market. As such, this should also be a consideration in subsequent legislation.
Finally, many foreign companies, especially those located in countries where the relevant restrictive measures are issued, may be directly exposed to the dilemma of complying with both the provisions of the Anti-Foreign Sanctions Law and the provisions of their own countries. Thus, we need to consider in future legislation if it is viable to allow companies to apply for permission in relation to the relevant blocking obligation, as similarly provided in the Blocking Measures, to reduce their burden, based on the actual situation.
5. What Actions Are To Be Taken at This Stage?
Currently, as the Anti-Foreign Sanctions Law only provides for the basic requirements for relevant counteracting and blocking obligations, the answers to the questions we have mentioned above may also be open-ended for the time being. Relevant companies, however, can making the following preparations in advance:
Firstly, companies should place the regulatory requirements of the Anti-Foreign Sanctions Law at the same global level as the trade compliance requirements of other countries. As mentioned above, the Anti-Foreign Sanctions Law is in a sense the first Chinese sanctions law, and its blocking requirements are not limited to subjects within China. Multinationals should take the impact of the Anti-Foreign Sanctions Law seriously in the context of their global operations and incorporate its requirements into their global compliance policies. In particular, it is necessary to enhance training for overseas companies and employees on the relevant legal requirements and compliance in China, and to improve global compliance policies. These actions may help them avoid any breach of the Anti-Foreign Sanctions Law due to lack of understanding of the relevant Chinese regulations, thereby triggering the relevant penalties or even be placed on the counter-sanction list, which could have material adverse impact on their business in China and globally.
Secondly, Chinese subsidiaries of foreign companies should localise their trade compliance systems and corresponding texts as soon as possible. In advising foreign-invested companies on updating their trade compliance systems, we have noted that many of them have followed the relevant system of their head office, but some specific requirements may contradict the Chinese legal requirements after the implementation of the Anti-Foreign Sanctions Law. In such cases, the old compliance system creates a compliance loophole, which may bring additional legal risks to the company. In view of this, relevant companies should assess their existing trade compliance regime and system in the light of the relevant Chinese legal requirements as soon as possible, and adjust the system and processes if appropriate based on the assessment, to ensure that the corresponding wording and mechanism meet the requirements of the relevant Chinese laws and regulations, including the Anti-Foreign Sanctions Law. Furthermore, companies should also conduct information screening over entities on China’s counter-sanction list in their daily risk screening of counterparties, red flagging the transactions involving the listed entities, and decide whether to proceed the relevant transactions in accordance with the specific regulatory requirements of the Anti-Foreign Sanctions Law. In addition, some foreign companies should pay special attention to the additional compliance requirements that may be imposed on their China operations after the adoption of the Anti-Foreign Sanctions Law. For example, some US companies may trigger reporting obligations under the US anti-boycott rules as they comply with relevant Chinese prohibitions on the counter-sanction list. This should also be addressed in the adjusted regime to avoid overlooking the additional risk of non-compliance arising from the relevant legal updates.
Finally, companies should include the Anti-Foreign Sanctions Law in its risk assessment at the outset of a specific transaction in order to understand the feasibility and specific risks of the transaction. While the exact scope and standards of enforcement under the Anti-Foreign Sanctions Law are not clear yet, in light of some of China’s prior practices in administrative enforcement, the following factors may affect the specific liability and consequences undertaken by both domestic and foreign companies under the Anti-Foreign Sanctions Law:
- The decision maker of the relevant transaction;
- Whether the relevant transaction decision goes beyond the minimum compliance standard for offshore restrictive measures;
- The subject who specifically executed the relevant transaction;
- The equity relationship between the decision maker and the executor of the transaction; and
- The employment of the decision maker and the executor of the relevant transaction in affiliates, particularly those in China.
At the same time, companies should, in preparation of contracts, consider the follow-up plan of the relevant transaction in the event of a potential risk, so as to avoid the non-compliance risk due to the change in the international trade landscape, regardless of whether the transaction is carried out.
Additionally, relevant companies should continue to pay attention to the subsequent legislative process of the Anti-Foreign Sanctions Law and adjust their business when appropriate. As the current Anti-Foreign Sanctions Law only provides for the basic requirements, it is expected that the relevant departments of the State Council will further prescribe the relevant specific requirements in the subsequent legislative process and may establish an effective connection between the Anti-Foreign Sanctions Law and the Blocking Measures, the Regulations on the Unreliable Entity List, the Export Control Law and other relevant provisions. Relevant companies should strive to understand the specific scope of enforcement of the Anti-Foreign Sanctions Law by referring to specific interpretations and representative cases in the process, and make appropriate adjustments to their existing China-related operations to meet both the domestic and foreign regulatory compliance requirements as far as possible so as to ensure smooth business operations.
As noted by the Legislative Affairs Commission of the NPC in its report to the Standing Committee of the NPC, the legal “toolbox” for risk prevention should be complete and equipped with a variety of tools. After the implementation of the Anti-Foreign Sanctions Law, the establishment of an effective connection between this Law and other laws and administrative regulations with respect to countermeasures will be the focus of the new legislation. It is believed that more explicit provisions and instructions will be released shortly to make the relevant rules clearer. We will continue to follow the legislative changes and bring you our insights in the first moments.
The Draft specifies two types of countermeasures – first, China has the right to take countermeasures against foreign countries that, for the purpose of interfering in China’s internal affairs, take discriminatory restrictive measures such as containment and suppression against Chinese citizens and organisations according to its own laws; second, China will take necessary countermeasures against some entities and individuals that advocate, incite, and fund Taiwan independence, Xinjiang independence, Tibet independence, Hong Kong independence and have other serious violations that endanger China’s sovereignty, security, and development interests.