Alert 12.22.20
Alert
Alert
01.13.21
On January 9, 2021, China’s Ministry of Commerce (MOFCOM) published The Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Sanctions (Blocking Statute) with immediate effect.
Overall, the Blocking Statute, drawing upon similar legislation in the European Union, establishes the legal basis and the mechanisms to allow Chinese citizens, legal persons, and other organizations (Persons) to seek remedies as a result of prohibitions or restrictions on normal economic, trade, and related activities with Persons of other countries. It is aimed at safeguarding China’s national sovereignty, security and public interests, and protecting the legitimate rights and interests of Chinese Persons.
Scope and Target of Blocking Statute
The Blocking Statute applies to situations where the extraterritorial application of foreign legislations and sanctions are determined to be “in violation of international law and the basic principles of international relations” and “unjustifiably prohibits or restricts Chinese Persons from engaging in normal economic, trade, and related activities with another country (or region) or the Persons of other country or region.” (Article 2 of the statute). Note that the subsidiaries and affiliates invested and established by foreign Persons in China are deemed as Chinese Persons under Chinese laws.
Working Committee
The Blocking Statute establishes a joint committee called the “working mechanism” (Gongzuo Jizhi in Mandarin) that comprises relevant Chinese ministries under the leadership of MOFCOM (Working Committee).
Through such Working Committee, MOFCOM, the National Development and Reform Commission (NDRC), and other Chinese government ministries are responsible and have the power to assess and determine whether there exists unjustified extraterritorial application of foreign legislation and sanctions.
Factors for Evaluation of Foreign Legislations and Sanctions:
The Blocking Statute specifies the following factors in determining whether the extraterritorial application of reported Foreign Laws are justifiable:
Key Counteract Measures Under the Blocking Statute
The Blocking Statute establishes several counteract measures to handle unjustified extraterritorial application of foreign legislations and sanctions.
Our Observations
The issuance of the Blocking Statute is another major step taken by MOFCOM to tackle cross-border sanction issues after the Provisions on the Unreliable Entity List published in September 2020 and the other legislations aimed in protecting China’s national security and national interests . The Blocking Statute includes only 16 high-level Articles and much of the implementation of the Blocking Statute remains to be clarified.
The Blocking Statute appears to focus on unjustified “secondary sanctions.” For example, when a party is designated on the List of Specially Designated Nationals and Blocked Persons (SDN List) maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), there are primary sanctions and secondary sanctions. Primary sanctions apply to activities that take place within OFAC’s jurisdiction, including activities by U.S. Persons or activities involving the U.S. financial system. Secondary sanctions involve transactions that take place outside of OFAC’s jurisdiction. With secondary sanctions, the U.S. Government is attempting to use sanctions to pressure parties outside U.S. jurisdiction to act in line with U.S. policy goals. The Blocking Statute aims to address such type of secondary sanctions that China deems to violate international law and the basic principles of international relations, and unjustifiably prohibits or restricts normal economic, trade and related activities between Chinese Persons and Persons of third countries.
A MOFCOM spokesperson confirmed that the promulgation of the Blocking Statute does not affect China’s international obligations and commented that some countries “have not only prohibited economic exchanges between their own nationals and relevant countries, but also coerced enterprises and individuals from other countries to stop economic and trade activities with relevant countries. These actions violate the principles of international law such as sovereign equality, hinder international trade and cross-border capital flows, and undermine the normal international economic order, and are generally opposed by the international community.” 1
Subsidiaries of foreign companies incorporated in China are regarded as Chinese Persons and must comply with the Blocking Statute. We anticipate that the Blocking Statute will create compliance challenges to companies that are subject to both foreign legislations and the Blocking Statute. For example, U.S. companies that must comply with certain U.S. legislation or sanction measures may have subsidiaries in China that must comply with both U.S. sanction measures and the Blocking Statute. If a certain U.S. sanction measure is “blocked” by a Prohibition Order, the Chinese subsidiaries of the U.S. companies will need to apply for an exemption to be able to continue to comply with the U.S. sanction measure without violating the Prohibition Order.
Commercial contracts with Chinese entities should also be carefully reviewed and updated to ensure that any termination rights based on compliance of export controls and other applicable laws of foreign jurisdictions will not violate a Prohibition Order or trigger legal proceedings in a People’s Court in China against such terminating party.
We will closely monitor developments and provide updates as more information is released.
1 See www.mofcom.gov.cn/article/news/202101/20210103029779.shtml