China's New Law to Counteract Foreign Long-Arm Jurisdictions

On 10 June 2021, China passed the Anti-Foreign Sanctions Law (“Law”), which took effect immediately. The new Law consolidates previous anti-sanction measures issued by the executive arm, and provides legal ground for government authorities to take necessary countermeasures against foreign governments’ sanctions. The new Law creates a framework which can be expected to present difficult choices for multinational companies, individuals and other regarding compliance with sanctions imposed on Chinese entities and individuals.

Background

Increasing international conflicts in recent years have seen the United States and European Union imposing sanctions on PRC government officials, companies and individuals for various reasons. In response, Chinese authorities have taken countermeasures. For example, China’s Ministry of Foreign Affairs has announced 11 rounds of sanctions against NGOs, foreign politicians, arms producers and other foreign entities since March 2020, without specifying the scope of sanctions and the consequences.

On 19 September 2020, China’s Ministry of Commerce (” MOFCOM “) unveiled the Provisions on the Unreliable Entity List to blacklist foreign entities (including companies, organizations or individuals) that are considered endangering China’s national sovereignty, security and development interest or that suspend normal transactions with or apply discriminatory measures against Chinese entities. If a foreign entity is included in the Unreliable Entity List, it will be subject to restrictions or prohibitions on China-related trade, investment in China and travel or work permits, as well as fines. However, no foreign entity has yet been publicly put on the list.

On 9 January 2021, MOFCOM also issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (“Blocking Rules”), which provided for countermeasures against the unjustified extraterritorial application of foreign legislation and measures targeting Chinese interests. Where a citizen, legal person or other organization of China is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities, he/it must report such matters to MOFCOM within 30 days. A working mechanism composed of relevant PRC authorities and led by MOFCOM will determine whether the extraterritorial application of foreign legislation or measures is “unjustified”, and, if the determination is affirmative, MOFCOM will issue a prohibition order against any recognition, execution and compliance with such foreign legislation or measures.

The previous countermeasures are fragmented and without sufficient legislative support, whilst the new Law will establish a coordination mechanism and authorize the State Council and its Ministries to compile anti-sanction lists, apply countermeasures, and issue specific regulations. These will make China’s countermeasures against foreign government sanctions more systematic and powerful.

Highlights of the Law

Circumstances subject to Countermeasures

The Law focuses on taking countermeasures when foreign countries take “discriminatory restrictive measures” against Chinese citizens or organizations or interfere with China’s internal affairs. The new Law does not define “discriminatory restrictive measures” and further clarifications are needed.

If a foreign country, organization or individual implements, assists with or supports an act endangering national sovereignty, security or development interests, China may implement countermeasures.

Who are the Targets?

The followings could be subject to the countermeasures:

  • individuals or organizations have been put onto the anti-sanction list for being directly or indirectly involved in the formulation, decision-making and implementation of discriminatory restrictive measures against Chinese citizens or organizations or for interfering with China’s internal affairs;
  • the spouse and immediate family members of a blacklisted individual;
  • senior executives or actual controllers of the blacklisted organizations;
  • organizations where the blacklisted individuals serve as senior executives; and
  • organizations that are actually controlled by the blacklisted individuals or organizations or the formation or operation of which involves such individuals or organizations.

What are the Countermeasures?

Those blacklisted would face the following countermeasures:

  • denial of visa issuance, cancellation of visas, denial of entry or expulsion;
  • seizing and freezing of assets within China;
  • intended counterparties within China will be prohibited or restricted from carrying out transactions, cooperation and other activities with such organizations and individuals; and
  • other necessary measures, which are not yet spelled out.

What are the Consequences of Violations?

Organizations and individuals in China must implement specific countermeasures, failing which may result in restriction or prohibition from “relevant activities”, which is subject to further clarification. The new Law does not clearly define “organizations and individuals in China”, but foreign-invested enterprises and representative offices in China appear to be covered. In addition, any organization or individual that fails to implement or cooperate with implementation of specific countermeasures will be held liable by law.

A Chinese party aggrieved by foreign discriminatory restrictive measures can bring a civil claim in PRC courts to stop infringement as well as seek damages against “any organization or individual” that implements or assists with implementing such restrictive measures. While “any organization or individual” will likely cover both Chinese and foreign organizations and individuals, it is not yet clear whether entities within China could be held liable for actions of their affiliates outside of China.

Our Observation

Companies will not be subject to countermeasures as long as they are not involved in the formulation, decision-making or implementation of foreign government’s discriminatory restrictive measures. However, for those multinational groups operating across the globe, their risks profile will increase substantially, whether they are trading in goods/services through different group members or with third party business partners. They will likely find that complying with sanctions imposed by one government could inevitably lead to countermeasures being imposed by another government.

The new Law only provides general principles and framework with respect to Chinese countermeasures to foreign sanctions. How it will be implemented and applied in practice is subject to the development of international relations, as well as corresponding implementation rules, judicial interpretation and cases. For both Chinese local companies and multinational corporations having a footprint in China, it is important to pay close attention to latest regulatory development in this aspect and be mindful of the compliance and litigation risks with respect to conflicts of law between foreign jurisdictions and China created under the new Law. These companies should review and improve their existing transaction contracts or templates to deal with potential contractual disputes arising from sanctions imposed by foreign governments.