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Compliance, compliance, compliance: A primer for Canadian companies

In recent years, the United States (U.S) has added a growing number of Chinese firms to various sanctions and export control-related entity lists, and expanded its military end-users interpretation. In turn, China has accelerated the introduction of multiple laws and regulations that can be viewed as countermeasures. Overall, there is a heightening of multi-jurisdictional compliance risks for international companies and stakeholders doing business with Chinese entities across a number of sectors.

U.S. sanctions and export controls

The Bureau of Industry and Security (BIS), a part of the U.S. Department of Commerce, deals with national security and high technology issues. BIS' Entity List and Military-End User (MEU) List inform exporters, re-exporters, and transferors of heightened export controls applied to the listed entities.

The Entity list 

The MEU list

The Department of Defense's Communist Chinese military companies list (the DoD List)

In 2020, the Department of Defense began compiling a list of Chinese entities referred to as “Communist Chinese military companies” operating directly or indirectly in the U.S., under the statutory requirement of Section 1237 of the National Defense Authorization Act for the fiscal year 1999.

Once an entity is placed on the DOD list, the U.S. may impose wide-ranging sanctions against it, generally via a presidential executive order. Sanctions may include:

As of January 14, 2021 44 Chinese companies were on the DoD list.

The only executive order (EO) in relation to the entities on the DoD list was EO13959 issued on November 12, 2020 (an EO13974 was issued on January 13, 2021 amending certain elements of the EO13959). The EO prohibits U.S. persons from making purchases of publically traded securities of the entities on the DoD List. 

On December 28, 2020, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) published additional information on the implementation of the EO 13959. The Biden Administration has placed a number of executive orders issued by the Trump Administration, including this one, under review.

Chinese sanctions and export controls

China is developing comprehensive sanctions and export control toolkits, ostensibly to safeguard national security, and likely to respond to measures by the U.S. government seen by China to contain its development.

The three most relevant tools are:

The Unreliable Entity List

Published on September 19, 2020, the Chinese Ministry of Commerce (MOFCOM)'s Provisions on the Unreliable Entity List (the Provisions) provide the legal framework and mechanism for the Unreliable Entity List, a listing of foreign entities that China views as having impinged on its national security or interest.

Key articles of the Provisions are:

Detailed rules on the operation of the Provisions, including enforcement guidelines, are yet to be released.

The Export Controls Law

On October 17, 2020, China's much-anticipated Export Control Law (ECL) was promulgated, coming into force on December 1, 2020. Before the new law, China's export control regime was comprised of various disparate laws, administrative regulations, and guidelines (e.g., Foreign Trade Law, Customs Law, etc.).

Key provisions include:

China’s new export control law can negatively impact the sourcing of strategic intermediate goods and technologies from China, as well as research and development collaborations between Chinese and foreign entities.

The Blocking Rules

On January 9, 2021, MOFCOM issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the Blocking Rules), effective immediately. The Rules create a system to block the extraterritorial application of foreign laws and measures on Chinese citizens, companies, and organizations by third-country entities. For example, the rules would apply if a Canadian company was perceived to harm Chinese entities' interests through actions in compliance with U.S. sanctions.

Key provisions include:

COMPLIANCE, COMPLIANCE, COMPLIANCE.

Canadian companies should stay informed of the US and Chinese sanctions and export control-related developments and seek counsel/compliance professionals' advice to evaluate the risk of exposure and compliance requirements to minimize business operational risks and supply-chain disruptions.

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