China Issues Blocking Rules to Counter Foreign Sanctions and Other Measures

WilmerHale
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On January 9, 2021, China’s Ministry of Commerce (“MOFCOM”) promulgated the Rules on Blocking Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (阻断外国法律与措施不当域外适用办法) (“Blocking Rules”).1 The Blocking Rules took effect immediately without undergoing the normal 30-day public consultation period which China has committed to honor with respect to foreign-related legislation.2

Given the proximity in time to the ramped-up trade sanctions and other actions by the Trump Administration, it is tempting to interpret the timing of the Blocking Rules as an effort to take advantage of the disarray in the presidential transition in the US to respond to these recent actions. Among such recent actions which have caused anger in China are the sanctioning on December 7, 2020 of Vice-Chairpersons of the Standing Committee of the National People’s Congress for actions curbing democracy in Hong Kong.3 The Blocking Rules are designed, however, to target only those trade sanctions and export control measures that effectively impact third countries or regions, not US measures that block trade between the US and China directly.3 For simplicity of exposition, references herein to sanctions generally include export controls.   

These Blocking Rules are principally intended to block the extraterritorial effect of laws and measures unilaterally imposed by foreign countries or regions (as opposed to measures approved by the United Nations and international treaties as indicated in Article 15 and made clear by the MOFCOM spokesperson in an accompanying press release) banning or restricting Chinese operators (including Chinese citizens, legal persons and other organizations) from transacting with operators in third countries or regions (Articles 2 and 5). The Blocking Rules do not impact bans or restrictions on business activities between the sanctioning country (a foreign country, such as the US) and the sanctioned country (China). 

In other words, if these Blocking Rules are intended to retaliate against current US sanctions on China, they are arguably unlikely to impact refusals by US companies to deal with Chinese companies in order to comply with US sanctions and export control measures. They would, however, impact companies in a third country/region such as those in Europe, Japan, South Korea and Taiwan that take action in response to sanctions or export controls imposed by the US against China. This may force such third country/region companies to choose between compliance with US sanctions/export controls and the Blocking Rules. 

Hypothetically, the Blocking Rules may also make it difficult for US companies, including their China-based subsidiaries, to comply with US sanctions against third countries if China blocks such sanctions. Consider a scenario in which the US unilaterally imposes sanctions on a third country or an operator therein (Country X), including so-called “secondary sanctions” on companies that do business in or with Country X. If China deems such unilateral “secondary sanctions” unjustified and in violation of international law, and therefore blocks the secondary sanctions, it would essentially allow Chinese companies, including China-based subsidiaries of foreign companies, to continue to transact with Country X, but at risk of violating the US sanctions.

It is unclear at this moment if China-based subsidiaries of foreign companies, including foreign financial institutions, are subject to the Blocking Rules. The Blocking Rules apply to legal persons and other organizations registered in China, which include subsidiaries of foreign companies and joint ventures established between foreign and Chinese investors, as well as branches of foreign companies in China. Arguably, this means that subsidiaries, joint ventures and branches of foreign financial institutions in China are also subject to the Blocking Rules. If so, it not only creates the above-mentioned dilemma for subsidiaries of US financial institutions in China, but also triggers an obligation for these financial subsidiaries to report to MOFCOM within 30 days any US-imposed restrictions to which they are subject with respect to transactions with third countries, basically any applicable sanctions lists involving third countries (Article 5). It is arguably not within MOFCOM’s mandate or authority to review or block such lists, as the People’s Bank of China (“PBOC”) is the lead regulator of financial institutions in China, and the PBOC may be reluctant to take action on sanctions lists applicable to foreign financial institutions lest that lead to restrictions on Chinese financial institutions. 

MOFCOM has yet to clarify these points, but we note that the imposition of a ban on compliance with primary sanctions would be inconsistent with China’s own practice of imposing formal or informal primary sanctions on trade with other countries, e.g., Norway over the selection of a Nobel Peace Prize laureate and South Korea over the hosting of a military facility. 

It is important to note, however, that the Blocking Rules are more broadly intended to counter the exceptional influence which the US enjoys through the imposition of unilateral sanctions by virtue of its influence over the global financial system.

The Blocking Rules function in a manner comparable to the EU blocking statute aiming to protect EU operators from the extraterritorial application of third country laws, including US laws.4 However, unlike the EU blocking statute, which provides an annex listing the laws, regulations and other legislative instruments that are subject to blocking, the Blocking Rules in China do not provide for such a list and leave more latitude for Chinese authorities’ discretion and clarification.

The major implications of the Blocking Rules are as follows: 

  1. The Blocking Rules are intended to enable China to legally nullify the effect of US sanctions that may effectively apply extraterritorially.

    A multi-departmental working mechanism led by MOFCOM together with the National Development and Reform Commission is authorized to issue orders blocking the recognition of, implementation of and compliance with foreign legislation and measures (“Blocking Orders”) which it deems to have unjustified extraterritorial effect and are in violation of international law and the basic principles of international relations (Articles 2, 4 and 7).  This essentially means that when a sanctioning country bans or restricts Chinese operators from transacting with operators from third countries/regions outside the territory of the sanctioning country, China may choose to unilaterally nullify such bans/restrictions if it deems they are unjustified and in violation of international law.  For example, if China deems the export control measures imposed by the US banning or restricting third countries/regions selling goods incorporating US-origin technology to Chinese companies as having unjustified extraterritorial effect, China may unilaterally nullify such export control measures affecting third countries/regions, rendering the third country/region companies’ compliance with the US export control measures and refusal to deal with China a violation of a Chinese Blocking Order.   Or, for example, if China deems that sanctions unilaterally imposed by the US against a third country are unjustified and in violation of international law, then it may nullify such sanctions and allow Chinese companies to continue to transact with the third country. Any financial institutions refusing to clear transactions between China and the third country may be found in violation of the Chinese Blocking Order. When determining whether such extraterritorial effects are unjustified, the working mechanism is to consider (i) whether they violate international law and basic principles of international relations; (ii) the impact on Chinese sovereignty, security and development interests; (iii) the impact on the legal interests of Chinese operators; and (iv) catchall other factors (Article 6). The working mechanism may suspend or terminate a Blocking Order. Upon a Chinese operator’s application, the working mechanism may also provide exemptions in a Blocking Order (Articles 7 and 8). It is likely that foreign parties may apply for and be granted an exemption through their Chinese presence for China, if any, enabling China to avoid adverse impacts on inbound foreign investment. 
  2. Obligation on Chinese operators to report when they are subject to bans or restrictions to transact with third countries.  Chinese operators are obligated to truthfully inform MOFCOM within 30 days upon being banned or restricted by the extraterritorial application of foreign laws to transact with third countries or regions, or operators thereof (Article 5). As noted above, it is not clear if China-based subsidiaries of foreign financial institutions are also subject to the same MOFCOM reporting obligation.
  3. Legal remedies.  Chinese operators may file suit in domestic court from the party which has benefitted if they suffer losses due to another party’s compliance with a Blocking Order-covered foreign law, except when such other party has obtained an exemption under Article 8. Chinese operators may also claim damages from another party benefiting from a court ruling based on Blocking Order-covered foreign laws. The court may require and enforce the relevant party to compensate the plaintiff for its losses (Article 9). The fairness of any such judicial procedure is at best questionable given the intent of the Blocking Rules and the haste with which they have been implemented.5 Where, in adherence to the Blocking Orders, a Chinese operator suffers significant losses resulting attributable to non-compliance with the relevant foreign laws and measures, the relevant government departments may provide necessary support to alleviate the impact of the losses (Article 11).  Although China does not have extraterritorial jurisdiction to compel third country/region companies to disregard a ban or restriction that a foreign country like the US imposes on dealing with China, such third country/region companies may still be found responsible by a Chinese court if they choose to comply with the foreign sanction, risking their assets and reputation in China. Again, if a Blocking Order targets a unilateral sanction involving a third country imposed by a foreign country, then any financial institutions blocking transactions between China and such third country in compliance with the sanction may face the risk of litigation in China and impairment of their assets and reputation in China. 

Conclusion

The Blocking Rules are drafted broadly which allows wiggle room for further interpretation and clarification. But they may put non-US global companies in the difficult position of having to choose between compliance with US sanctions or Chinese rules. For example, if a semiconductor company in Japan, South Korea or Taiwan refuses to sell to a Chinese telecommunications company on the US entity list, and such restriction is considered unjustified by the Chinese government and blocked by its order, then the Chinese company may sue the other company for damages, and such other company may have its assets in China seized for enforcement by the Chinese court if it does not otherwise comply with the court judgment.

China may also unilaterally nullify any unilaterally imposed sanctions on third countries by a foreign country such as the US, allowing (under Chinese law) Chinese companies to violate such sanctions. Foreign financial institutions, and arguably their China-based subsidiaries, may find themselves between a rock and a hard place when deciding whether to observe US or other unilateral sanctions by blocking the transactions between China and the third country or to comply with the Chinese Blocking Order to clear the transactions.  

It is unclear whether MOFCOM intends to provide further clarification on the scope or list of foreign laws and measures it intends to block, and the scope of application of the Blocking Rules, e.g., to what extent do the Blocking Rules impact Chinese and third country subsidiaries of foreign companies, especially US financial institutions. In any event, both US and non-US multinational companies doing business with China will have to take the Blocking Rules into account if their business is subject to US sanctions against entities or individuals in third countries, and to the extent that their subsidiaries in other countries are subject to US sanctions. 

Footnotes - 

  1. Official English translation is available here.
  2. Art. 15 of the Regulations on Procedures for the Formulation of Rules (rev. 2018) requires that drafts of rules be published for comment for at least 30 days, except for those rules required to be kept confidential. 
  3. In a press conference, Pro. Han Liyu stated that the Blocking Rules apply to “secondary sanctions”. See Protecting legitimate rights and interests and safeguarding international economic and trade order - authoritative expert’s answers to reporters’ questions on the Rules on Blocking Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, Today China, Jan. 11, 2021, available here.
  4. Council Regulation (EC) No 2271/96, available here.
  5. Chinese courts in certain intellectual property matters have essentially expanded their jurisdiction internationally through the issuance of anti-suit injunctions in particular, see more here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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