China’s New Anti-Foreign Sanctions Law: Understanding Its Scope And Potential Liabilities.

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China’s New Anti-Foreign Sanctions Law: Understanding Its Scope And Potential Liabilities.

 

23 July 2021

 

Asia Pacific Legal Updates
 

China’s new Anti-Foreign Sanctions Law (AFSL) (中华人民共和国反外国制裁法)[1] achieves two goals. First, it creates a menu of countersanctions available to Chinese authorities—visa restrictions, asset and transaction blocks within China—taken straight from the U.S. sanctions playbook. Second, it creates a formal statutory basis for the kinds of Chinese sanctions measures that have already been put in place over the past 12 months. Targets of the AFSL are individuals or entities involved in creating or carrying out China-related sanctions implemented by foreign governments; that could include foreign officials who enact China-related sanctions, and individuals and companies that comply with those sanctions, anywhere in the world. The AFSL also expands the scope of civil claims available in Chinese court for parties harmed by a counterparty’s compliance with foreign sanctions.
 

The AFSL is a broad stroke statute with only 16 articles. Questions about its exact scope and enforcement focus will be addressed through future administrative orders from the Ministry of Commerce (MOFCOM) and the Ministry of Foreign Affairs (MOFA). In the meantime, any company that operates in China or does business with Chinese parties should understand the parameters of this new law and the competing risks it poses vis-à-vis the sanctions regimes of the United States and other countries.

 

Background

 

On June 10, 2021, the National People’s Congress Standing Committee (NPCSC) passed the AFSL, which took immediate effect.  Following various China-related sanctions measures implemented by the United States over the past two years, the AFSL sets the statutory foundation for China’s framework of sanctions countermeasures, which have so far included:

 

  • Provisions on the Unreliable Entity List (UEL), an export controls framework established in September 2020 by MOFCOM that mirrors the Entity List maintained by the U.S. Commerce Department. This was followed by the NPCSC’s passage of the Export Control Law in October 2020. See our client alert.
     

  • Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (Blocking Rules), a sanctions blocking framework promulgated in January 2021 by MOFCOM that enables MOFCOM to issue orders to prohibit compliance with specified extraterritorial foreign sanctions. See our client alert.
     

  • Various sanctions imposed by MOFA against certain U.S., EU, British, and Canadian individuals and entities since July 2020, resulting in visa denials and assets blocks in China, in response to sanctions implemented by those governments targeting Chinese individuals and entities and “interference with China’s internal affairs.”
     

The AFSL proclaims that “China opposes global hegemony and foreign intervention” and authorizes imposition of countermeasures where a foreign country undertakes “discriminatory restrictive measures against Chinese citizens or organizations” or otherwise “interferes with China’s domestic affairs.”[2]
 

Who, and What Types of Conduct, Are Targeted?

 

The AFSL establishes an “Anti-Sanctions List.” Any individuals or entities “directly or indirectly involved in formulating, deciding, or implementing the discriminatory restrictive measure” (i.e., the foreign sanctions provision targeting Chinese individuals or organizations) can be designated for inclusion on the “Anti-Sanctions List” by “relevant departments in the State Council,”[3] i.e., most likely MOFCOM and/or MOFA. The broad language means that the Anti-Sanctions List could include foreign government officials and agencies involved in drafting or implementing sanctions that impact Chinese parties, as well as individuals and entities that comply with those sanctions anywhere in the world.

 

The AFSL authorizes the designation of not just individuals and entities involved in creating or carrying out sanctions against Chinese targets, but also their affiliates, including: (a) their immediate family members; (b) their senior managers or control persons; (c) entities in which they serve as senior managers; and (d) entities in which they have control or participated in their establishment or operation.[4]

 

Unlike the EU Blocking Statute, the AFSL does not identify which specific foreign sanctions are blocked. This creates uncertainty for those seeking to comply with the AFSL, while it provides broad discretion to Chinese authorities to decide where to focus on enforcement. We expect future MOFCOM and MOFA orders to provide more clarity.

 

What Are the Countersanctions?

 

The AFSL sets forth a menu of sanctions countermeasures that the Chinese authorities can impose on anyone designated on the Anti-Sanctions List. These countermeasures are broad and mirror those in other countries such as the United States:

 

  • Denial of visas, banning entry into, and deportation from China;

  • Seizure and freezing of assets located in China;

  • Blocking transactions with individuals and entities in China; and

  • “Other necessary measures.”[5]

  •  

The AFSL’s sanctions countermeasures do not have extraterritorial effect—they apply only within Chinese jurisdiction and require compliance only by “individuals and entities within China.”[6] They do not include U.S.-style “secondary sanctions” that reach beyond Chinese jurisdiction, doubtless because both MOFCOM’s Blocking Rules and the AFSL itself expressly object to the extraterritorial application of other countries’ sanctions. As such, a designated entity on China’s Anti-Sanctions List may have its assets and transactions in China blocked, but any assets and transactions that do not have a nexus to Chinese jurisdiction likely will not be impacted.
 

Conduct Anywhere Could Make a Party a Target

 

Although the AFSL’s sanctions countermeasures do not have extraterritorial effect, the conduct that could trigger countermeasures against an individual or entity could happen anywhere in the world. In multiple provisions describing the prohibited conduct that could create liability under the AFSL, the statutory language can be read to cover conduct anywhere within or outside of China.[7] For example, a government official located in the United States who drafts China-related sanctions legislation could be designated on the Anti-Sanctions List. Similarly, a company located in a foreign country that implements those China-related sanctions could also face a risk of designation. The resulting liabilities could include the Chinese sanctions countermeasures as described above and/or civil claims in Chinese court as described below.

 

Therefore, non-Chinese companies should be aware of the risk of liability under the AFSL if they take steps anywhere in the world to terminate dealings with a Chinese business partner in order to comply with foreign sanctions.

 

Seeking Civil Damages and Injunctions in Chinese Court

 

The AFLS broadly prohibits any “individuals and organizations” from “implementing or assisting in the implementation of the discriminatory restrictive measures.”[8] It creates a civil claim by allowing individuals and organizations to file lawsuits to seek damages and injunctions in Chinese courts against “organizations and individuals [who] violate the provisions of the preceding paragraph and infringe upon the lawful rights and interests of Chinese citizens and organizations.”[9]

 

The MOFCOM Blocking Rules issued in January 2021 had already created a civil claim where a Chinese party is harmed by a counterparty’s compliance with foreign sanctions outside of that foreign government’s jurisdiction (i.e., extraterritorial or “secondary” sanctions).  Article 15 of the AFSL appears to expand the availability of civil claims because, unlike the Blocking Rules, the AFSL does not limit civil claims only to extraterritorial implementation of foreign sanctions. For example, if a non-Chinese bank sought to comply with U.S. sanctions by blocking a Chinese company’s assets in the United States or a third country, the AFSL leaves the door open for a cause of action for the Chinese entity against the non-Chinese bank in Chinese court.

 

Anti-Sanctions Designations and Countermeasures to Be Issued by Public Orders

 

Individuals and entities doing business with Chinese counterparties should monitor MOFCOM prohibition orders and other administrative orders issued by MOFA and other departments within the State Council. Article 9 of the AFSL requires regulatory actions taken pursuant to the AFSL to be done by published administrative orders. This should provide advance notice and a degree of certainty to the courts, and potential claimants and defendants, as to what foreign sanctions will be the target of Chinese countermeasures.

 

Departments within the State Council, primarily MOFCOM and MOFA, have the power to decide whom to designate for inclusion on the Anti-Sanctions List,[10] what sanctions countermeasures to impose on designated individuals and entities,[11] and when to suspend, modify, or cancel countermeasures.[12]

 

Looking Ahead

 

The scope of the AFSL is broad, and future MOFCOM and MOFA orders will provide further clarity on how it will be implemented. The ultimate effectiveness of the AFSL in deterring foreign individuals and entities from implementing or complying with foreign China-related sanctions will largely depend on how actively the Chinese authorities enforce it and related administrative measures (including the Blocking Rules, UEL, and MOFA sanctions). In the 12 months leading up to the AFSL’s promulgation, MOFA implemented countersanctions on a limited number of U.S., British, European, and Canadian government officials and entities. In the six months since MOFCOM promulgated the Blocking Rules, not a single foreign sanction prohibition order has been issued to operationalize their blocking measures.

 

To minimize collateral economic impacts, the U.S. government has been relatively selective in its imposition of China-related sanctions. This same approach might be expected by the Chinese government in imposing sanctions countermeasures under the AFSL, limiting countermeasures to egregious, high-profile cases and relying on the mere threat of countermeasures to deter compliance with China-related foreign sanctions. Looking ahead, we expect administrative orders from MOFCOM and MOFA to operationalize the AFSL and to provide further clarity on what the Chinese authorities’ enforcement focus and scope will be under the AFSL.

 

As further explained in the Terms / Notices linked below, the information provided herein is not legal advice. Any information concerning the People’s Republic of China (“PRC”) is not an opinion on, determination on, or certification of the application of PRC law. We are not licensed to practice PRC law. 

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For further information, please contact:

 

B. Chen Zhu, Partner, Morrison & Foerster

[email protected]
 

[1] People Republic of China’s Anti-Foreign Sanctions Law (中华人民共和国反外国制裁法) (promulgated by the Standing Comm. Nat’l People’s Cong., June 10, 2021).

[2] Id., art. 3.

[3] Id., art. 4.

[4] Id., art. 5.

[5] Id., art. 6.

[6] Id., art. 11.

[7] Article 3 states that “China shall have the right to take countermeasures against a foreign country’s attempts to . . . take discriminatory restrictive measures against Chinese individuals or organizations.” Article 12 states that “no entities or individuals shall implement or assist in implementing any discriminatory restrictive measures by a foreign country.” Article 15 states that “countermeasures may be taken as necessary against any foreign country, organization or individual that implements, assists in, or supports any act that jeopardizes China’s national sovereignty, security, or development interests.”

[8] Id., art. 12.

[9] Id.

[10] Id., art. 4, 5.

[11] Id., art 6.

[12] Id., art 8.