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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:

Anti-Foreign Sanctions Law

With the adoption of the Anti-Foreign Sanctions Law, China added to its evolving toolkit of measures designed to counter the effect of foreign measures restricting activities of Chinese persons. With the Blocking Rules adopted in January 2021 covering the so-called secondary sanctions, the Anti-Foreign Sanctions Law plugs the gap by addressing the primary sanctions; and provides an underlying legislative basis for the disparate measures currently in effect (Unreliable Entities List, the Blocking Rules and the Export Controls Law) and ones that are yet to come.

The Anti-Foreign Sanctions Law does not fundamentally change capacity of the Chinese government to sanction foreign entities. In fact, China has already done so before in relation to three U.S. military suppliers (in an unspecified way), as well as against EU and US individuals and organisations. The new law does bring a common legislative denominator under China’s various sanctions tools. It also leaves a considerable discretion – largely through lack of clarity in the provisions and the absence of implementing regulations – in how these tools will be deployed.

With the increased geopolitical tensions, many foreign businesses operating in China may find themselves in the compliance vise of Chinese and home-country sanctions. This is likely to contribute to a continued bifurcation between supply chains and business operations in China and the rest of the world for many international firms. This bifurcation, however, is not to be confused with decoupling in the sense that the former Trump Administration used the term, since successive business sentiment surveys indicate that foreign companies have no intention to leave China – on the contrary, many increase their investments and efforts to onshore the Chinese supply chains.

For more information on the Anti-Foreign Sanctions Law, please see additional background information.

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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