China Publishes Blocking Statute to Counteract Unjustified Extraterritorial Application of Foreign Legislation and Sanctions

Pillsbury Winthrop Shaw Pittman LLP

TAKEAWAYS

  • The Blocking Statute provides the legal basis for refusing to recognize, implement, and comply with unjustified extraterritorial application of foreign legislations and sanctions that prohibit or restrict normal economic, trade, and related activities between Chinese Persons and Persons of other countries.
  • A Chinese Person is required to report to MOFCOM any unjustified foreign legislation and sanctions within 30 days, and MOFCOM will make a decision whether to issue a Prohibition Order.
  • A Chinese Person may also seek judicial relief from a Chinese court for damages incurred by the counterparty as a result of complying with the unjustified foreign legislation and sanctions. Global businesses that comply with sanctions deemed illegal under the Blocking Statute can be sued for compensation in Chinese courts.

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:

  1. whether international law or the basic principles of international relations are violated;
  2. potential impact on China’s national sovereignty, security and development interests;
  3. potential impact on the legitimate rights and interests of Chinese Persons; and
  4. other factors that should be taken into account by the Working Committee.

Key Counteract Measures Under the Blocking Statute

The Blocking Statute establishes several counteract measures to handle unjustified extraterritorial application of foreign legislations and sanctions.

  1. Information Reporting

    Article 5 of the Blocking Statute provides that where a Chinese Person is prohibited or restricted by foreign legislation and sanctions from engaging in normal economic, trade, and related activities with a third country or its Persons, the Chinese Person should report such matters to MOFCOM within 30 days.

    However, it is unclear how such 30-day reporting requirement should be implemented. For example, if a party is designated on a sanction list of a sanctioning country prior to the enactment of the Blocking Statute and a Chinese Person plans to conduct business with such sanctioned party, should such 30-day reporting period start when the Chinese Person has knowledge that the foreign party is on the SDN List or when the parties enter into a letter of intent or a definitive agreement? This remains to be clarified.
  2. Assessment and Determination

    As noted above, MOFCOM – through the Working Committee – will assess and determine whether there exists an unjustified extraterritorial application of foreign legislation and sanctions based on the factors described above. The Blocking Statute, however, does not specify a time limit for MOFCOM to make such determination.
  3. Prohibition Order and Exemption

    Where it is determined that there exists an unjustified extraterritorial application of foreign legislation and sanctions, MOFCOM may issue a prohibition order (Prohibition Order) finding that the relevant foreign legislation and sanctions are not recognized, enforced, or observed. The Prohibition Order may be suspended or withdrawn by decision of the Working Committee based on actual circumstances.

    A Chinese Person may file a written application to MOFCOM for exemption from compliance with the Prohibition Order which should include reasons for the application for exemption and the scope of exemption. Application approval shall be made within 30 days from the date of acceptance of the application, and decisions shall be made in a timely manner in case of emergency.
  4. Judicial Relief

    Article 9 of the Blocking Statute provides that where a party complies with the foreign legislation and sanctions within the scope of a Prohibition Order, and thus infringes upon the legitimate rights and interests of a Chinese Person, the Chinese Person may institute legal proceedings in a People’s Court in China and claim for compensation.
  5. Punishment

    Article 13 of the Blocking Statute provides that where a Chinese Person fails to truthfully report as required or fails to comply with the Prohibition Order, MOFCOM may give a warning, order the Person to rectify within a specified period of time, and may impose a fine according to the severity of the circumstances.

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

商务部条约法律司负责人就《阻断外国法律与措施不当域外适用办法》答记者问 (mofcom.gov.cn)

[View source.]

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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