Mounting U.S. Sanctions And Chinese Countermeasures Create New Legal And Reputational Risks For Third-country Businesses.

Legal News & Analysis - Asia Pacific - China - Regulatory & Compliance

2 February 2021
 

Over the past year, we have seen waves of actions by the Trump Administration targeting parties in China and Hong Kong. These actions ranged from economic sanctions against Chinese and Hong Kong officials and organizations, export controls against Chinese companies in a host of sectors, including technology, textiles, agriculture, and infrastructure, a ban on securities investments in entities deemed by the U.S. Defense and Treasury Departments to be “Chinese Military Companies,” as well as attempted bans on the use of certain Chinese social media apps. 
 

These actions primarily restrict the activities of U.S. persons. However, third-country parties could also face liability if they facilitate prohibited activities involving U.S. persons, goods, financial systems, or some other U.S. touchpoint. Moreover, U.S. secondary sanctions that apply to certain targets pose liability for third-country parties even if the underlying activity has no U.S. touchpoint whatsoever. Given the impact on financial transactions and supply chains, third‑country businesses have had to update their due diligence and compliance programs to avoid liability. Some third-country businesses have resolved to terminate certain business relationships due to reputational and/or legal risks.
 

In response to these U.S. actions, China’s Ministry of Commerce (“MOFCOM”) in January 2021 promulgated the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the “Rules”). The Rules’ express aim is to counteract exterritorial measures that seek to restrict dealings between Chinese and third-country businesses (“Extraterritorial Measures”).
 

The Rules apply to “Chinese citizens, legal persons or other organizations.” Chinese companies organized under Chinese law are covered as “Chinese legal persons,” as are foreign companies’ subsidiaries organized under Chinese law. This means that non-Chinese multinationals should be mindful of the compliance obligations of their Chinese subsidiaries under the Rules. The Chinese branches or representative offices of non-Chinese companies are not traditionally considered “Chinese legal persons,” but they are likely covered as “other organizations” in China.
 

MOFCOM largely modeled the Rules on the sanctions blocking statutes of the European Union and other countries. The Rules contain notable parallels with the EU’s blocking statute, both of which: (i) impose an obligation on persons subject to an Extraterritorial Measure to notify relevant authorities, (ii) allow the imposition of civil penalties on parties that fail to comply with the Rules, and (iii) create a basis for persons harmed by the Extraterritorial Measure to claim compensation from the party that caused harm by complying with it. This last component has already garnered a great deal of attention from third-country businesses because this theory of liability potentially extends to companies located in third countries that, for example, stop doing business with a Chinese entity due to U.S. secondary sanctions.
 

In light of these competing U.S. and Chinese regulatory developments, Japanese companies with business dealings in China need to consider the scope and level of risk posed from both sides as they seek to navigate these various obligations.
 

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For further information, please contact:

 

B. Chen Zhu, Partner, Morrison & Foerster

[email protected]