On June 10, 2021, China enacted the
Law on Countering Foreign Sanctions (the “
Law”) to deflect and disincentivize the growing use of sanctions and other “discriminatory restrictive measures” by foreign governments against Chinese interests.
The Law (a crowd-sourced translation is available here and the official Chinese version here) creates a mechanism through which individuals and organizations (including companies) can be added to a “countermeasure list” (“反制清单”) and, together with affiliated individuals and entities, be subjected to certain retaliatory measures for their roles in “interfering with the internal affairs of China” in ways that are “in violation of international law and basic principles of international relations.” Individuals and organizations within China—potentially including foreign-invested entities—are prohibited from implementing or assisting with the implementation of “discriminatory restrictive measures,” and are required to offer cooperation and implement Chinese countermeasures.
This new law will create substantial challenges for private companies, who may (1) be determined by the Chinese authorities to have “directly or indirectly participated in the formulation, decision-making or implementation” of said “discriminatory restrictive measures” of foreign governments, or (2) find themselves facing the predicament and almost impossibility of fully complying with laws of both China and a foreign jurisdiction at the same time, or (3) be sued by a Chinese party that has suffered damages from the private company’s compliance with foreign measures.
This alert addresses six key questions about the Law and discusses some of the knowns and unknowns at this early stage.
Context
The Law complements existing Chinese regulations that aim to counter foreign acts. These existing regulations include (1) Regulations on the Unreliable Entity List, issued by China’s Ministry of Commerce (“MOFCOM”); (2) MOFCOM’s January 2021 blocking statute, i.e., Measures to Block the Improper Extraterritorial Application of Foreign Laws and Measures, and (3) Article 48 of the Export Control Law, which addresses abuse of export control measures by foreign countries.
The Law is the first legislative act by China’s legislature since it committed in March 2021 to “accelerate legislation related to foreign affairs, to strengthen the legal toolbox for meeting challenges and preventing risks with a focus on countering foreign [i.e., non-Chinese] sanctions, interference, and long-arm jurisdiction, and to promote the formation of a comprehensive system of laws and regulations related to foreign affairs.” A legislature spokesperson described the Law as a necessary response to the increased use of sanctions by foreign governments against Chinese entities and individuals including with regard to Hong Kong and Xinjiang. The Law did not undergo a public comment process, and its existence was made public only on June 7, 2021, when it was submitted to the legislature for a second reading following a previously undisclosed first reading in April 2021.
1. Scope of application: which foreign acts and measures are targeted?
The Law appears to target a broad range of measures seen as harmful to China’s interests. Article 3 of the Law authorizes China to take countermeasures (or retaliatory measures) and defines the scope of the Law to target foreign acts that seek to “contain and suppress China,” or all kinds of “discriminatory restrictive measures taken by foreign states against Chinese citizens and organizations” and “interference with internal affairs of China” that are “in violation of international law and the basic principles of international relations.” Other than in the title of the Law, the narrower term “sanctions” is generally not used in the text of the Law, which instead refers to “discriminatory restrictive measures.” For example, it appears that the Law targets, or at least seeks to target, not only unilateral acts taken by the U.S. government under U.S. sanctions law (e.g., primary and secondary sanctions that may implicate China), but also export control restrictions against Chinese entities as well as foreign legislative or administrative acts that seek to sanction China on various other grounds.
In addition, Article 15 of the Law by analogy authorizes Chinese countermeasures against acts taken, assisted, or supported by foreign states, organizations, or individuals that “endanger China’s sovereignty, security, and development interests.” This “catch-all” provision gives the Chinese government broad discretion to respond to foreign acts which it may seek to counter in the future.
2. Authorized countermeasures: what actions does the Law authorize in response to foreign “discriminatory restrictive measures?”
A. Designation on Countermeasure List
Article 4 of the Law authorizes government agencies of the State Council, China’s cabinet, to establish a ”countermeasure list” and designate individuals and organizations against whom countermeasures may be implemented under the Law. The Law expressly targets individuals and organizations (including companies) that have directly or indirectly participated in the formulation, decision-making, or implementation of “discriminatory restrictive measures” for inclusion on the list. Although the foreign actions of concern to China may formally be taken by foreign states and governments, the Law targets the individuals and organizations (including companies) that advocated for, sponsored, or otherwise actively participated in the formulation or implementation of these governmental actions.
B. Countermeasures Against Related Parties of Designated Entities
Article 5 authorizes State Council agencies to put in place countermeasures against certain individuals and entities affiliated with parties designated under Article 4, including:
- spouses and close relatives of designated individuals;
- senior management and actual control persons of designated organizations such as corporations;
- employers of designated individuals, if the individuals serve in senior management roles; and
- other organizations controlled by designated individuals or in whose establishment or operations they participate.
C. Specified Countermeasures
Article 6 authorizes government agencies of the State Council to take a number of specified countermeasures against designated entities (under Article 4) and their affiliated individuals and organizations (under Article 5):
- Refusal to issue (Chinese) visas, denial of entry, visa cancellation, and/or deportation;
- Seizing or freezing of movable property, immovable property, and other types of property within Chinese territory;
- Prohibition against transactions, cooperation, or other activities by Chinese organizations and individuals with designated entities and related parties;
- Other necessary measures.
3. Government authority and decision-making procedure: Who will enforce the Law and how?
The Law authorizes unspecified “relevant government agencies of the State Council” to make decisions regarding entity designation and countermeasures based on their scope of work and responsibilities. These “relevant” agencies may include the State Council itself, the Ministry of Foreign Affairs, the Ministry of Public Security and its Immigration Administration, MOFCOM, the Ministry of Justice, and potentially others.
Article 10 authorizes the establishment of an inter-ministerial Work Coordination Mechanism on Countering Foreign Sanctions at the national level to coordinate the measures and information-sharing among agencies.
All the decisions under the Law are final and not subject to judicial review (Article 7). However, decisions may later be suspended, amended, or withdrawn under changed circumstances (Articles 8 and 9).
4. Obligations and liabilities: what are the potential risks and liabilities for companies and individuals under the Law?
The Law imposes an obligation on organizations and individuals within China to comply with the relevant Chinese countermeasures (Article 11(1)). This would appear to include China-registered affiliates of multinational companies. Government agencies may enforce this obligation, including to “restrict or prohibit [violators] from conducting relevant activities or businesses”; no further details are specified.
Article 14 of the Law also states that any organization or individual that does not enforce or cooperate in implementing countermeasures is to be “pursued for legal responsibility” but does not specify the consequences.
Furthermore, the Law obliges organizations and individuals not to obey, comply with, or assist in compliance with the relevant discriminatory restrictive foreign measures (Article 12(1)).
The Law authorizes Chinese parties adversely impacted by said foreign measures to initiate litigation in Chinese courts against those in compliance with the foreign measures that infringe upon the rights of Chinese parties. The litigation remedy can be cessation of the infringing acts or monetary damages.
5. Relationship with existing Chinese regulations: how will the Law interact with other Chinese regulatory measures aimed at countering foreign acts?
The Legislative Affairs Commission of China’s legislature released a Q&A article on its website in an effort to shed light on the interpretation and enforcement of the Law. According to the Q&A, the Law will complement and co-exist with existing Chinese regulations that aim to counter foreign acts. As discussed above, these existing regulations include (1) MOFCOM’s Regulations on the Unreliable Entity List, promulgated in September 2020, (2) MOFCOM’s blocking statute, i.e., Measures to Block the Improper Extraterritorial Application of Foreign Laws and Measures, promulgated in January 2021, and (3) Article 48 of the Export Control Law, which addresses abuse of export control measures by foreign states. If necessary, other regulations or rules on Chinese countermeasures may be promulgated by the relevant government agencies. However, the Law should serve as the statute that provides clear legal authority on Chinese countermeasures and is much wider in scope and more authoritative in China’s legislative hierarchy than departmental rules, such as those issued by MOFCOM.
6. Comparison: how does the Law compare with blocking statutes in other jurisdictions?
The Law represents the latest in a series of laws implemented in certain jurisdictions to counter the effects of foreign sanctions, and China’s legislature acknowledged drawing upon other laws countering sanctions of other jurisdictions. For example, the Law follows actions by Russia in recent years to counter the effects of U.S. and EU sanctions, and the EU’s extension of the European Union Blocking Statute (EC Regulation No. 2271/96) in 2018 to broaden its application to prohibit compliance with aspects of the U.S. sanctions in relation to Iran. Those various counter-sanctions measures vary in their application, and a comparison of the Law to the EU Blocking Statute is instructive, in this regard. The EU Blocking Statute ─ which was first implemented by the EU in 1996 ─ prohibits EU persons and entities from complying with aspects of the U.S. sanctions relating to Iran and Cuba, and establishes a private right of action for persons who suffer losses as a result of another party’s efforts to comply with the U.S. sanctions covered under the EU Blocking Statute. The EU Blocking Statute does not, in contrast to the Law, apparently provide a framework to impose countermeasures against foreign parties that seek to implement the U.S. sanctions in the EU, but rather focuses on regulating the conduct of EU parties in complying with the U.S. sanctions. In that regard, the EU Blocking Statute has been criticized for having the counterintuitive effect of targeting EU companies that happen to face U.S. compliance risks as a consequence of the international reach of the U.S. sanctions. Perhaps as a result, the EU Blocking Statute has not thus far been a source of substantial enforcement attention among EU regulators (moreover, given the relatively narrow scope of U.S. sanctions that the EU Blocking Statute covers, many EU companies have found it readily feasible to implement robust U.S. sanctions compliance programs without triggering potential breaches of the EU Blocking Statute). By apparently including foreign-invested companies as a target and a potential defendant in a civil lawsuit for their compliance with foreign acts, the Law seems to be taking a fundamentally different approach to counter-sanctions.
Key Takeaways
The Law is brief and drafted at a high level of abstraction, and, like many Chinese laws, seems intended to give the authorities broad discretion. The Law leaves many significant questions unanswered, including those related to interpretation, application, and enforcement.
The Law provides a legislative underpinning for existing acts taken previously by the Chinese government against foreign government officials and companies, e.g., countermeasures imposed on certain defense companies in October 2020 for arms sales to Taiwan; those imposed on 28 U.S. officials in January 2021 for “violating China’s sovereignty”; and those imposed on ten EU individuals, nine UK individuals, and eight entities in March 2021 for “spreading lies about Xinjiang.”
The Law seeks to deter foreign acts—such as those related to Xinjiang, Hong Kong, and Taiwan—by imposing broad obligations and seemingly tough penalties for foreign governments, corporations, and individuals. The Law may create challenges for multinational companies doing business in multiple jurisdictions, which may find themselves attempting to comply with inconsistent and contradictory Chinese and foreign legal requirements.
The January 2021 blocking statute is the only other precedent for a Chinese regulation providing a cause of action in Chinese courts to challenge foreign actions. That blocking statute carries less weight in China’s legislative hierarchy than the new Law. It will be worth watching to see how this new course of action will play out in Chinese courts and what defenses, if any, will be available to companies acting in good faith to comply with conflicting foreign legal requirements.
If you have any questions concerning the material discussed in this client alert, please contact the members of our China practice.
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