Biden Issued An Executive Order To Reset And Expand Sanctions On Chinese Military-Related And Surveillance Companies.

On June 3, 2021, President Biden issued a new executive order (" EO " or "Executive Order") to "respond to the threat of securities investments that provide financial support for certain companies in the People's Republic of China" (" EO 14032 " or "Executive Order No. 14032"). The executive order prohibits U.S. persons from investing anywhere in the world in publicly traded securities issued by companies believed to be operating in the field of China’s defense and surveillance technology or related to such companies. For the names of these companies, please refer to the administrative The annex to the order and the US Treasury Department’s Office of Foreign Assets Control (" OFAC ") list of "non-specified nationals-Chinese military industrial enterprises (" CMICs "). In terms of its objectives and the content of the ban, Executive Order 14032 maintains the former president The contents of the Executive Order No. 13959 issued by Lampe in November last year that imposed sanctions on Chinese military-related enterprises (" CCMCs "). However, the Executive Order No. 14032 and the guidelines issued thereafter are used in several ways in the following ways. Important aspects have expanded and restricted the previous administrative order: (i) expanded the categories of companies and their subsidiaries that may be subject to sanctions, (ii) set a new compliance period, (iii) revoked Administrative Order 13959 And (iv) clarified that U.S. persons are not prohibited from assisting non-U.S. investors to invest in the securities of Chinese military-industrial enterprises ("CMICs"). For our previous discussion on sanctions related to Chinese military-related enterprises (" CCMCs "), please see our Morrison & Foerster law News: Trump government restrictions on investment in the United States who were included in the Pentagon's list of China's publicly traded securities , the uS OFAC issued FAQs to clarify policy on investment in China's military enterprises ,A week before Trump's departure, he took a radical approach to the sanctions on Chinese military-related companies . The US court stopped the sanctions that designated Xiaomi as Chinese military-related companies ("CCMCs") during Trump's administration, allowing the continued trading of Xiaomi securities .
 

Key points
 

1. Executive Order 14032 does not substantially modify the restrictions on the Chinese Military-related Enterprises ("CCMCs") sanctions program applicable to companies designated under the Executive Order . The main prohibition on the purchase or sale of publicly traded securities of Chinese military-related enterprises ("CCMCs") (now Chinese military industrial enterprises ("CMICs")) [1] by Americans has not changed. Like the Chinese military-related enterprises ("CCMCs") program, continue to allow Americans to conduct transactions with Chinese military enterprises ("CMICs") in other ways. However, Administrative Order No. 14032 replaced and replaced all five effective parts of Administrative Order No. 13959, expanded and/or improved the standards for the “National Defense and Related Materials Industry or Surveillance Technology Industry” of the Chinese economy, and revoked No. 13974 Administrative Order-the original revised version of Administrative Order No. 13959.
    

2. Administrative Order No. 14032 expanded the scope of companies that may be designated as targets of sanctions to include not only companies related to China's "military-industrial complex", but also "surveillance technology departments" in the Chinese economy . The executive order continues to emphasize China’s military-civilian integration strategy, authorizing sanctions on companies operating in the field of national defense and related materials, or companies that control or are controlled by persons (individuals or entities) operating in the field of national defense and related materials. This will expand the scope of companies sanctioned by Executive Order No. 13959. Administrative Order No. 14032 sets persons identified as related to China's surveillance technology industry as targets of sanctions. The purpose is to combat the use of Chinese surveillance technology within and outside China to "facilitate repression or serious violations of human rights." The Chinese government deals with the concerns of Hong Kong and Xinjiang. The original list of Chinese military enterprises ("CMICs") included at least one new company that appeared to be a surveillance technology company.

3. Executive Order 14032 resets and extends the deadline for compliance with its prohibition . The private sector has 60 days from June 3, 2021 (that is, until August 2, 2021) to stop its new investments in companies listed in the annex to the new executive order, and one year (that is, : Until June 2, 2022) used to withdraw capital before the effective date of the ban. These 60-day and one-year grace periods also apply to companies that may be included in the list of Chinese military enterprises ("CMICs") (also known as the list of Chinese military-related enterprises ("CCMCs")) published by OFAC in the future . A very important point is that the new administrative order completely abolishes the ban in the previous revised Administrative Order No. 13959. Therefore, no ban will apply from June 3 to August 2, 2021.
    

4. Compared with the entities included in the previous list of Chinese military-related enterprises ("CCMCs"), OFAC has added more entities to its list of Chinese military enterprises ("CMICs"), although many entities are duplicates . Although the number of sanctioned entities has increased after the issuance of the new administrative order, many of these 59 Chinese military-industrial enterprises ("CMICs") were originally on the list of the old Chinese military-related enterprises ("CCMCs") (it is worth noting that , Who filed a lawsuit with the Washington District Court of the United States, questioned its inclusion in the list of Chinese military-related enterprises ("CCMCs") except for the three entities). [2] In addition, OFAC released some frequently asked questions (" FAQs "), which weakened other parts of the Chinese military-related enterprises ("CCMCs") plan that were strongly criticized, and provided a more narrow interpretation of the ban. For example, FAQ 899 clarified that "only entities whose names are identical to those on the [Chinese Military Industrial Enterprises ("CMICs")] list will be subject to the ban". According to the China Military-related Enterprises ("CCMCs") program, the ban also applies to entities whose names are "highly consistent" with the listed Chinese military-related enterprises ("CCMCs"). To assist with these changes, Executive Order 14032 amended Executive Order 13959, which only authorizes the Minister of Finance to add entities to the list of Chinese Military Industrial Enterprises ("CMICs") after consulting with the Secretary of State and (where appropriate) the Secretary of Defense. In the past, which entities belonged to Chinese military-related enterprises ("CCMCs") were determined by the Ministry of National Defense and the Ministry of Finance. [3] Given that the Treasury Department is familiar with the legal requirements that support the sanctions program, this clarification will reduce the likelihood of the Biden administration facing judicial challenges, similar to the judicial challenge against Executive Order 13959 that plagued the Trump administration.
    

5. Actions taken by U.S. persons on behalf of foreign entities are not widely prohibited . As discussed further below, the new OFAC FAQ also clarifies related issues that have hindered U.S. companies that have subsidiaries or affiliates abroad. It clearly states that U.S. persons-including those employed by non-U.S. entities Individuals-can participate in the purchase or sale of securities of Chinese military industrial enterprises ("CMICs"). In other words, U.S. persons can provide investment consulting, investment management and similar services to non-U.S. persons (including foreign entities and funds) with regard to the purchase or sale of prohibited securities by non-U.S. persons, provided that such purchases or sales are not intended to evade sanctions. For example, buying or selling for the ultimate benefit of Americans.
    

6. The Biden administration issued Executive Order No. 14032 to show its willingness to further strengthen the previous administration’s tough attitude towards China . Executive Order 14032 is only one component of greater efforts to strengthen the US's competitive strategy against China and promote US interests and values. [4] The Biden administration also intends to make Executive Order 14032 clarify and strengthen the framework of Executive Order 13959 to ensure that these policies have a stronger legal basis and prevent them from future legal challenges. [5]
    

in conclusion
 

For most of the private sector, Executive Order 14032 is a welcome amendment to Executive Order 13959, which clarified the intricate prohibitions that caused widespread confusion in the past. However, the new executive order has not correspondingly reduced the Trump administration’s hardline attitude towards China or has no use to change this stance. On the contrary, this new executive order issued within the first six months after President Biden took office, as well as the recent activities carried out by Congress to increase pressure on China (for example: the recently proposed "China Challenges Act of 2021" "The "Endless Frontier Act" amendment) proves that this attitude has not changed. Therefore, global financial institutions and other companies should take measures to carefully monitor the changes in the list of Chinese military industrial enterprises ("CMICs") released by OFAC, and comprehensively evaluate businesses involving other related fields of concern to the US government, including those related to Hong Kong, Xinjiang, and sensitive areas. The technical aspect.
 

For those who want to know more about Administrative Order No. 14032 and how its prohibition applies in practice, please refer to the new Chinese military enterprises ("CMICs") FAQs and updated Chinese military enterprises ("CMICs") issued by OFAC below. CMICs") "In-Depth Discussion" on FAQs.
 

In-depth discussion: OFAC frequently asked questions
 

After the issuance of administrative order 14032, OFAC issued guidance to clarify the scope of the administrative order and answered urgent questions that have caused confusion for market participants since the issuance of administrative order 13959 on November 12, 2020. Specifically, in addition to updating several FAQs related to Administrative Order No. 13959, OFAC also released the following 8 new FAQs [6]
 

New FAQ
 

• FAQ 898 explains that Executive Order 14032 amended Executive Order 13959 and cancelled Executive Order 13974. It also summarized the scope of Administrative Order No. 14032 as described above, and explained the list of Chinese Military Industrial Enterprises ("CMICs") issued by OFAC and the amendments to common issues related to Administrative Order No. 13959.
   

• FAQ 899 clarifies that only entities on the list of Chinese military industrial enterprises ("CMICs") (including entities whose names exactly match the names of entities listed on the list) are subject to Executive Order 14032. FAQ 899 also reiterated the latest effective date and reiterated that entities are allowed to purchase or sell for divestment purposes within one year after being included in the list of Chinese military industrial enterprises ("CMICs").
   

• FAQ 900 explains that OFAC plans to use its discretion to confirm that its current or past business involves persons who are involved in the following situations. These businesses include or support Chinese technology companies to monitor relevant personnel outside of China, or "development, promotion, Selling or exporting Chinese surveillance technologies that are currently, in the past, or may be used to monitor religions or ethnic minorities, or otherwise contribute to the suppression or serious violations of human rights."
   

• FAQ 901 clarifies that OFAC hopes that US persons (including financial institutions, stock exchanges, and other market intermediaries and participants) will rely on their due diligence to determine whether the new administrative order allows buying and selling activities. Information.
   

• FAQ 902 stipulates that U.S. persons are not prohibited from providing investment consulting, investment management or similar services (for example: advice, authorization, guidance or approval of purchase or sale) to non-U.S. persons who purchase or sell prohibited securities, provided that the relevant purchase or sale is required Will not violate the new administrative order (for example: the purchase and sale of securities is not for the "ultimate benefit of American persons", or the purchase or sale is not intended to circumvent the prohibition of the new administrative order).
   

• FAQ 903 clarifies that a U.S. person working in a non-U.S. entity can assist in the purchase or sale of prohibited securities on behalf of their employer, provided that the U.S. person’s participation is in the normal course of his employment and the purchase or sale is new As permitted by administrative order.
   

• FAQ 904 explains that US market makers and non-US market makers with American employees can engage in activities necessary for divestiture during the authorization period.
   

• FAQ 905 clarifies that Americans can continue to do business with entities on the list of Chinese military industrial enterprises ("CMICs"), provided that the relevant activities do not involve the purchase or sale of securities prohibited by the new administrative order.
   

Update FAQ
 

• FAQ 857 clarifies that the prohibition on the purchase and sale of securities of Chinese military industrial enterprises ("CMICs") by Americans only applies to Chinese military industrial enterprises ("CMICs") listed on the list of Chinese military industrial enterprises ("CMICs") issued by OFAC Subsidiary. In addition, OFAC’s 50% rule stipulates that if 50% or more of any entity’s interest is owned by one or more of the OFAC’s designated nationals and prohibited persons list, the entity shall be subject to the same restrictions as its sanctioned owner , This rule does not apply to entities listed only in accordance with Administrative Order No. 13959. Prior to this update, FAQ 857 previously stipulated that OFAC intends to specify whether subsidiaries of Chinese military-related enterprises ("CCMCs") or subsidiaries are owned or owned by one or more Chinese military-related enterprises ("CCMCs") under the 50% rule. control.
   

• FAQ 859 clarifies the term "publicly traded securities". "Publicly traded securities" includes those defined in the Securities Exchange Act of 1934 that are traded on stock exchanges or "over-the-counter" in any jurisdiction. Any "securities" denominated in currency. Although Administrative Order No. 14032 retains the definition of “publicly traded securities” in Administrative Order No. 13959 and incorporates the definition of “securities” in the Securities Exchange Act of 1934, Administrative Order No. 14032 omits the definition of “publicly traded securities” in Administrative Order No. 13959. "The second half of the definition, which stipulates that "if the currency or any bill, bill, bill of exchange, or bank acceptance bill is issued, the maturity date specified at the time of issuance does not exceed 9 months (not including the grace period), or any extension to If the maturity date is subject to the same restrictions, it shall belong to the securities specified in this order."
   

• FAQ 860  provides examples of the types of financial instruments that are considered to be "any publicly traded securities derived from such securities or designed to provide investment risks in such publicly traded securities", including derivatives (such as futures, Options and swaps), warrants, American depositary receipts, global depositary receipts, trading open-end index funds, index funds and mutual funds. Prior to this update, FAQ 860 focused on the financial instruments involved in the ban on "any securities derived from such securities or designed to provide investment risks in such securities" , not today's "publicly traded securities" .
   

• FAQs 861 clarifies the new executive order to continue to prohibit US persons holding Chinese investment in military enterprises ( "CMICs") securities of foreign funds (for example: exchange-traded funds or other mutual funds), no matter how small the position ( " once Rules "), there are few updates to FAQ 861, which are not substantive changes (for example: change "Chinese Communist Party Military Company" to "Chinese Military Industrial Enterprises ("CMICs")", and change "EO 13959" to "Economic Revision EO 13959”).
   

• FAQ 863 clarifies that Americans can engage in clearing, execution, settlement, custody, transfer agency and back-end services and other such support services, provided that the relevant transactions are permitted. Like the FAQ 861, only a few of the FAQs 863 have been made, not substantive amendments.
   

• In addition, FAQ 865 explains that market intermediaries (including market makers) can assist in the withdrawal of funds from prohibited securities, including the withdrawal of investment fund managers, but only if the assistance or intermediary activities are carried out during the relevant withdrawal period or are useless Violation of the ban of the new administrative order. In addition, Americans can buy or sell "relevant investment funds that are seeking to withdraw funds" during the relevant divestment period. The old FAQ 865 also mentioned the "one-off rule" and FAQ 862 (deleted), which clarified that Executive Order 13959 did not require Americans to divest prohibited securities before January 11, 2021.
   

• FAQ 871 clarifies that transactions and activities involving the purchase or sale of prohibited securities are permitted on stock exchanges operated by Americans. Frequently Asked Question 871 previously mentioned the general license to authorize these types of transactions, and the period of such consent is one year after the entity is included in the list of Chinese military-related enterprises ("CCMCs").
   

The National Security Business Team of MFG will continue to monitor the situation and inform you of any major developments.

B. Chen Zhu, Partner, Morrison Foerster

 

[1] In general, the ban applies to the "purchase or sale of any publicly traded securities of Chinese military industrial enterprises ("CMICs"), or any publicly traded securities derived from such securities or designed to provide investment risks in such securities". "Public trading" is a new amendment to "securities derived from such securities or designed to provide investment risks in such securities…". Previously, market investors were confused about whether non-publicly traded derivatives were prohibited, and which types of non-publicly traded derivatives were prohibited.

[2] The three entities refer to Gowin Semiconductor, Luokung Technology, and Xiaomi.

[3] According to the law that produced the "Pentagon List", that is, Article 1237 of the Strom-Simon German Defense Authorization Act for Fiscal Year 1999 and Article 1260H of the Defense Authorization Act for Fiscal Year 2021, the Secretary of Defense still needs to provide About the annual list and report of Chinese military industrial enterprises ("CMICs"). For this reason, on the same day that President Biden issued Executive Order 14032, the US Department of Defense announced its own list of 47 Chinese military companies. This list does not impose new restrictions, and most of the entities it contains are entities included in the list of Chinese military industrial enterprises ("CMICs") published by OFAC.

[4] Alex Leary and Gordon Lubold, Biden expands the blacklist of Chinese companies investing in the United States, Wall Street Journal (June 3, 2021), see: https://www.wsj.com/articles/biden-expands-blacklist -of-chinese-companies-banned-from-us-investment-11622741711 .

[5] Kellie Mejdrich, Biden strengthens Trump’s policy of restricting investment in Chinese companies, politician (June 3, 2021), see: https://www.politico.com/news/2021/06/03 /biden-restricting-investment-chinese-firms-491784 .

[6] OFAC deleted some frequently asked questions related to Executive Order No. 13959. It’s worth noting that OFAC deleted FAQ 872, which clarified that the American person held it after November 11, 2021 (or one year after the entity was included in the list of Chinese military-related enterprises ("CCMCs")) Prohibited securities are prohibited: "As a result, Americans are prohibited from holding prohibited securities after the relevant deadline."