It’s time to update your compliance polices if you trade in Chinese securities or export goods to China.
Since June, the Department of Defense (“DoD”) has been publishing lists of Communist Chinese military companies (“CCMC”) that the Secretary of Defense has determined are owned or controlled by and are “engaged in providing commercial services, manufacturing, producing, or exporting” to and for China’s People’s Liberation Army (“PLA”). Section 1237(b)(4) of the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 (Public Law 105-261) (the “Act”) requires the Secretary of Defense to publish lists of CCMCs that are “operating directly or indirectly in the United States or any of its territories and possessions.” See Section 1237(b) of the Act. The DoD has currently published four lists, which are available here: DoD Lists.
On November 12, 2020, the President issued Executive Order 13959, entitled “Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” This Order prohibits US persons from entering into transactions involving publicly traded securities or derivatives of any CCMC on the DoD Lists beginning at 9:30 am eastern on January 11, 2021. After that date, it also prohibits such transactions involving CCMCs added to the lists by the Secretary of the Treasury beginning at 9:30 am eastern sixty (60) days after the CCMC is added to the list.
On Wednesday, December 22, 2020, the Department of Commerce, Bureau of Industry and Security (“BIS”) added a number of Chinese companies to the Entity List because of their involvement in China’s Military-Civil Fusion doctrine (which was also mentioned in Executive Order 13959) and other support of the PLA. This requires all US persons to seek a license from BIS before exporting, reexporting, or transferring (in country) any item subject to the Export Administration Regulations (“EAR”). Basically, you would need to request a license to export a pencil to any of these companies.
The next day, BIS added a “Military End User” (“MEU”) List to the EAR. The MEU List includes one hundred two (102) Chinese, Russian, and Venezuelan companies, which are now deemed to be military end users, subject to Section 744.21 of the EAR. Supplement 2 to Part 744 lists items that require a license to export to these entities. The MEU List is available here: MEU List. Many of the Chinese companies on the MEU List are in the aviation and aerospace industry and are considered subordinate to named CCMC companies on the DoD List.
If you are trading in Chinese securities or if you export, reexport, or transfer (in country) goods, software, or technology to China, it’s time to update your compliance practices to incorporate these new DoD and MEU Lists and to keep up-to-date with changes to the Entity List. Expect more changes to these lists over the coming months as DoD, Treasury, and BIS expand their lists.