China Issues Statute To Counteract Extraterritorial Applicaiton Of Foreign Sanctions.

On 9 January 2021, China’s Ministry of Commerce ("MOFCOM") issued its Order No.1 of 2021: Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures ("PRC Blocking Statute" or "Rules").

The PRC Blocking Statute was approved by China’s State Council and immediately came into effect.
 

While the PRC Blocking Statute does not expressly state the foreign laws and measures to which it applies, its issuance (which follows the establishment by China of its Unreliable Entity List and Export Control Law, effective from September and December 2020, respectively) is widely viewed as a further response to the various sanctions and export controls imposed against China by the US administration in recent times.

The PRC Blocking Statute applies where the extra-territorial application of foreign laws and/or other measures prohibits or restricts Chinese nationals, legal persons or other organisations from engaging in normal economic, trade and related activities with foreign entities. Its stated purpose is to mitigate the impact on Chinese interests caused by extra-territorial application of foreign laws, to safeguard national sovereignty, security and development interests, and to protect the legitimate rights and interests of Chinese parties.
 

The Rules apply to “Chinese nationals, legal persons and other organisations”, the last of which is not explicitly defined. No guidance from MOFCOM is provided on whether the scope is potentially wide enough to cover business operations of multinational companies or firms in China.

The PRC Blocking Statute introduces the following measures and requirements:
 

·         Chinese nationals, legal persons and other organisations are required to make an accurate report to MOFCOM within 30 days of any instance where they face prohibition or restriction by foreign laws or measures from engaging in normal commercial activities with third-country entities.
 

·         A prohibition order may be issued by the Chinese government to the effect that the relevant foreign laws and other measures should not be recognised, enforced, or complied with, if the extra-territorial application of such laws is deemed unjustifiable. The PRC Blocking Statute does not specify any foreign laws and measures that may be implicated. Instead, a MOFCOM-led working panel will be established to evaluate and confirm whether specific laws is unjustifiable and should therefore be subject to a prohibition order, taking into account the extent to which extra-territorial application of such laws:
 

o    violates international law or the basic principles of international relations;
 

o    may have a negative impact on China’s national sovereignty, security and development interests;
 

o    may have a negative impact on the legitimate rights and interests of the Chinese nationals, legal persons or other organisations; and
 

o    in consideration of other factors that the working panel considers relevant. The Rules provide no guidance on what “other factors” may include. 
 

The working panel may also suspend or withdraw a prohibition order depending on actual circumstances. No details are provided.
 

Parties who fail to comply with the specified reporting obligation or a prohibition order may receive a warning, an order to rectify and/or a fine, depending on the severity of the violation.
 

·         To support compliance with the prohibition order, the PRC Blocking Statute gives the Chinese government discretionary powers to provide necessary support to Chinese parties who suffer significant losses as a result of compliance with prohibition orders. The Rules do not specify what kind of support may be provided or the circumstances in which such support will be available.
 

·         Exemptions from compliance with a prohibition order may be possible upon written application. Exemption applications must specify certain information, including the reasons for and proposed scope of the requested exemption. No guidance is provided on the specifics, such as what might be considered acceptable grounds for an exemption
 

The Rules also grant parties the right to bring a civil claim before a Chinese court and seek compensation for losses caused by the extra-territorial application of the foreign laws /measures that are subject to China’s prohibition orders.

The PRC Blocking Statute is similar in nature  existing legislation in other jurisdictions, most notably the EU Blocking Statute, which was introduced in 1996 and revised in 2018. The revised EU Blocking Statute prohibits any EU operator (widely defined) from compliance with US sanctions against Iran and Cuba.
 

Unlike the current EU Blocking Statute, which is specifically drafted to prohibit EU operators (broadly defined) from complying with specific US sanctions, the PRC Blocking Statute establishes only a general framework by setting out a  non-exhaustive list of factors to consider in determining which foreign laws should be subject to prohibition. In response to questions regarding which foreign laws will be targeted initially MOFCOM has stated that the Rules do not target any specific countries or specific transactions in specific areas, and that the working panel will keep a close eye on the extra-territorial application of relevant foreign laws and measures.
 

Notwithstanding these comments from MOFCOM and while the Rules do not provide for the publication of a list of specific sanctions regimes or foreign laws, prohibition orders issued in due course will be made publicly available, effectively creating a de facto list of “unjustifiable” foreign laws. It is not clear from the Rules whether exemptions will be made publicly available.

In the absence of specific guidance on the applicability of the Rules, it remains to be seen whether, and to what extent, business operations of multinational companies in China (such as Chinese subsidiaries of multinational companies, joint ventures established in China, branches and representative offices) will be subject to the Rules.

As is often the case with new legislation, the precise scope of the PRC Blocking Statute and the degree to which it will impact multinational operators in practice will become clearer as the Rules are implemented. We will continue to observe developments closely and update our clients as the picture becomes clearer.