On 10 June 2021, the Standing Committee of China’s National People’s Congress promulgated the Anti-Foreign Sanctions Law (the ASL), which took effect on the same date.
We set out below a few key points addressed in the ASL:
1. Whom does the ASL apply to?
Article 3 of the ASL provides that if a foreign country, in violation of international law and basic norms of international relations, contains or suppresses China, takes discriminatory or restrictive measures against Chinese citizens or organisations or interferes in China’s internal affairs, by using pretexts or in accordance with its own laws (the Discriminatory Measures), China has the right to take corresponding countermeasures.
The ASL further provides that the authorized department of the State Council (Authorized Regulator) may decide to put individuals (Individuals Concerned) and organizations (Organisations Concerned) directly or indirectly involved in the formulation, decision-making, and implementation of Discriminatory Measures on China’s counter-control list. The Authorized Regulator may also decide to take countermeasures against the following individuals or organizations (Related Individuals and Organizations):
- Spouse and direct family members of the Individuals Concerned;
- Senior management personnel or the actual controller of the Organizations Concerned;
- Organization(s) in which any Individual Concerned serves in a senior management position; and
- Organization(s) actually controlled by any Individual Concerned or Organization Concerned or in whose establishment and operation any Individual Concerned or Organization Concerned participates.
2. What countermeasures may be taken?
The countermeasures which the Authorized Regulator may take may include one or more of the following:
- Refusal to issue visas, denial of entry into China, cancellation of visas or expulsion from China;
- Sealing up, seizure or freezing of movable assets, real property and other assets located in China;
- Prohibition or restriction of individuals and organizations within China from conducting transactions with any Individuals Concerned, Organisations Concerned or Related Individuals and Organizations; and
- Other countermeasures as are considered necessary.
According to the ASL, decisions made by the Authorized Regulator on the matters outlined above will be final.
The Authorized Regulator may suspend, modify or cancel any countermeasures if the circumstances, on the basis of which the countermeasures were taken, have changed. Decisions of the Authorized Regulator and the State Council on the confirmation, suspension, modification and cancellation of the counter-control list and/or countermeasures will be announced to the public.
China will set up an anti-foreign sanctions working mechanism to be responsible for coordinating the relevant work. The relevant departments of the State Council will increase coordination and information sharing to decide on and implement countermeasures in the light of their respective responsibilities.
3. How is it relevant to you?
The ASL is not just about empowering the Authorized Regulator to take action against Discriminatory Measures; it may also have a significant impact on business activities in the commercial sector:
- The ASL requires organizations and individuals within China to implement the countermeasures determined by the Authorized Regulator; otherwise, the Authorized Regulator may restrict or prohibit non-compliant organization or individual from conducting certain activities, or take other actions permitted by law.
- The ASL also provides that no organization or individual, may implement, or assist the implementation of, Discriminatory Measures taken by any foreign country against Chinese citizens or organizations. If any organization or individual breaches this provision and damages the lawful interests of any Chinese citizen or organization, the latter may claim loss or damage against the former by starting legal proceedings in the Chinese courts.
The provisions mentioned above will be particularly concerning to multi-national companies (MNCs) with operations in China for the following reasons:
- A Chinese subsidiary of an MNC falls within the scope of “organizations within China”, and is therefore obliged to comply with the countermeasures taken by the Authorized Regulator; however, this may put it (and potentially its offshore parent company) in the position of violating the laws, regulations or orders of a foreign country; and
- The extent of “implementation or assisting in the implementation of any Discriminatory Measures” could be very broad. Potentially, subject to future clarification by the Authorized Regulator, termination by an MNC of a contract with a Chinese counterparty which is on the sanctions list of a foreign country may fall within the scope of this description if the sanctions imposed by the foreign country are regarded as Discriminatory Measures. The implications of this may be significant: even if the Chinese subsidiary of the MNC is not involved in the underlying transaction with the Chinese counterparty or its termination, it would still be exposed to the following risks:
- The Authorized Regulator may decide to take countermeasures against the Chinese subsidiary;
- If that happens, both the assets and the business of such Chinese subsidiary may suffer severe damage (e.g. assets being seized or frozen, losing business in China); and
- If a Chinese entity sues the MNC in a Chinese court for loss and damages and wins a favourable judgement, the equity interests in the Chinese subsidiary may be regarded as assets of the MNC and be at risk upon enforcement.
Due to the potentially significant negative impact on business activities in the commercial sector, and on China’s efforts in attracting and retaining foreign investments, the Authorized Regulator may conceivably take a very conservative approach in implementing the ASL in practice. Notwithstanding this, MNCs should be mindful of the potential risks under the ASL and make careful and informed business decisions amid the increasingly complicated sanctions regimes around the globe.
To recap, on September 19, 2020, the Ministry of Commerce of China (MOFCOM) issued the Measures on Unreliable Entities List, pursuant to which a foreign entity may be put on China’s “unreliable entity list” if its acts endanger the sovereignty, safety and development interests of China or if it discontinues normal transactions with Chinese parties in breach of normal market trading principles. On January 9, 2021, MOFCOM issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (referred to as China’s blocking measures), pursuant to which a working mechanism led by MOFCOM may issue an order to prohibit the application of foreign sanctions measures if such application is regarded as unjustifiable. The ASL has clearly kicked off a new era in China’s counter foreign sanctions regime, given that it stands at the top end of China’s legislative hierarchy and grants more extensive powers to law enforcement agencies to protect the interests of Chinese citizens and organizations.