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US expands sanctions targeting investments in securities of Chinese military companies



United States Publication June 17, 2021

The China-related sanctions space is very active and changes are made frequently. This publication is current as of June 17, 2021.

US President Biden issued Executive Order (EO) 14032 (the Order) on June 3, 2021, which expands upon a previous order issued by the Trump administration, EO 13959 (read our previous update), by creating a new framework for imposing prohibitions on investments in Chinese defense and surveillance technology firms. In particular, EO 13959, as amended by EO 14032, prohibits US persons from purchasing or selling publicly traded securities of any person designated or determined to meet certain criteria, including having operations in the defense and related materiel sector or the surveillance technology sector of the Chinese economy or being affiliated with such entities. In that respect, it broadens the criteria for potential designation as set out in the prior order, which mainly targeted companies with purported ties to the Chinese military. Amended EO 13959 aims to strengthen restrictions on the flow of US capital to companies that develop or use surveillance technology to facilitate repression or serious human rights abuse in and outside of China, including technology used for surveillance of religious or ethnic minorities.

The President listed 59 entities as subject to the prohibitions of EO 13959, as amended by EO 14032. The prohibitions against those listed entities take effect beginning at 12:01 a.m. eastern daylight time on August 2, 2021. In effect, therefore, the Order has restarted the clock for implementation of the sanctions on previously identified CCMCs. In conjunction with the Order, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) listed these 59 entities on its new Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List). Effective June 3, 2021, the NS-CMIC List replaced and superseded in its entirety the Non-SDN Communist Chinese Military Companies List (NS-CCMC List), which has been deleted from OFAC's website. OFAC also published new Frequently Asked Questions (FAQs), and updated existing FAQs, clarifying the scope of the prohibitions. In addition, the US Department of Defense (DoD) concurrently issued its own list of 47 "Chinese military companies" (CMCs), which does not appear to impose any new sanctions prohibitions at this time.1

Below, we summarize the key features of the latest restrictions and guidance issued by OFAC.

The prohibitions

EO 13959, as amended by EO 14032, prohibits the purchase or sale by US persons2 of any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any person listed in the Annex to the Order or any person determined:

  • to operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy of the PRC; or
  • to own or control, or to be owned or controlled by, directly or indirectly, a person who operates or has operated in any sector described above, or a person who is listed in the Annex to the Order or who has otherwise been determined to be subject to the Order's prohibitions.

In addition to expanding the criteria for designations, EO 13959, as amended, shifts the primary authority for designating CMICs from the DoD to the Treasury Department. OFAC signaled that it "expects to use its discretion to target, in particular, persons whose operations include or support, or have included or supported, (1) surveillance of persons by Chinese technology companies that occurs outside of the PRC; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse."3

EO 13959, as amended, defines "publicly traded securities" as those specified in Section 3(a)(10) of the Securities Exchange Act of 1934, including those denominated in any currency that trades on a securities exchange or a method of trading that is commonly referred to as "over-the-counter" in any jurisdiction.4 Previously, EO 13959 had included within the definition of "security" currency or any note, draft, bill of exchange or banker's acceptance with a maturity at the time of issuance not exceeding nine months. The amendment brings the definition more in line with that in the Securities and Exchange Act of 1934.

Similar to the prior order, the restriction on purchasing and selling publicly traded securities covers derivatives and securities designed to provide investment exposure to such securities. The new FAQs explain that this includes warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds.5 The restrictions will apply irrespective of the CMIC securities' share of the underlying index fund, ETF, or derivative thereof.6

Companies targeted

EO 13959, as amended, creates a new Chinese Military-Industrial Complex (CMIC) regime and identifies 59 companies, some of which were not included in the prior "Communist Chinese Military Company" (CCMC) list. It also excludes a handful of companies that were previously on the CCMC list.

A significant change is that the prohibitions of amended EO 13959 apply only to entities whose names exactly match the names of identities entities. Previously, OFAC's FAQs had identified as within the scope of EO 13959 transactions in the securities of entities whose names exactly or closely matched the names of identified CCMCs. The FAQs did not, however, provide any criteria to determine whether or not a given entity's name may "closely match" the name of an identified CCMC, so there was a great degree of uncertainty regarding how OFAC construed "closely match." The current FAQs ameliorate some of that ambiguity by stating, "Only entities whose names exactly match the names of the entities on the NS-CMIC List are subject to the prohibitions in EO 13959, as amended."7 Consistent with prior guidance, the FAQs also make clear that OFAC's "50 percent rule" (under which entities owned 50 percent or more by one or more blocked persons are also considered to be blocked persons) does not apply to entities listed solely pursuant to EO 13959, as amended.8

OFAC has now revoked its previous NS-CCMC list and replaced it with a new "Non-SDN Chinese Military-Industrial Complex Companies List" (NS-CMIC List).9 Notably, the NS-CMIC list encompasses companies operating in the defense sector, subsidiaries and affiliates of companies on the CCMC list, and two companies operating in the surveillance technology sector. The Biden Administration has indicated that it expects to add more parties to the NS-CMIC List in the future.

The DoD also issued its own "CMC" list which includes some of the companies on the CMIC list as well as others, though there is no indication that this separate list imposes any new sanctions prohibitions.

Application of the new Order

OFAC amended several FAQs and issued new FAQs explaining the scope and application of EO 13959, as amended.

Consistent with OFAC's prior guidance, the FAQs provide that US persons may engage in clearing, execution, settlement, custody, transfer agency, back-end services, and other such support services, so long as these services are not provided to US persons in connection with prohibited transactions.10 Expanding on its prior guidance, OFAC clarified that US persons are permitted to provide investment advisory, investment management, or similar services to a non-US person in connection with the non-US person's purchase or sale of a covered security, so long as the underlying purchase or sale would not otherwise violate EO 13959, as amended (e.g., neither the purchase nor sale of the covered security is for the ultimate benefit of a US person; the purchase or sale is not a willful attempt to evade the prohibitions of EO 13959, as amended; etc.).11 In addition, OFAC clarified that US persons employed by non-US entities may facilitate transactions in covered securities on behalf of their non-US employer, so long as such activity is in the ordinary course of their employment and the underlying purchases do not violate EO 13959, as amended.12

The FAQs also provide, consistent with OFAC's prior guidance, that market intermediaries and "other participants" may engage in "ancillary or intermediary" activities that are necessary for a US person to divest during the relevant wind-down period.13 Further, transactions by securities exchanges operated by US persons involving the purchase or sale of prohibited securities are permissible during the allowed wind-down period.14 In addition, OFAC clarified that US market makers, including non-US market makers who employ US persons, are permitted to engage in activities that are necessary to effect divestiture during the 365-day divestiture period or that are not otherwise prohibited under EO 13959, as amended.15

The FAQs also provide new guidance on the level of due diligence that US persons are expected to conduct in determining whether a transaction is prohibited under EO 13959, as amended, noting that US persons, including financial institutions, registered broker-dealers in securities, securities exchanges, and other market intermediaries and participants, may rely on information available to them in the ordinary course of business.16

Although the restrictions imposed on entities listed on the newly-named NS-CMIC List are not directly applicable to non-US persons and companies (provided there is no US nexus to their transaction), the NS-CMIC-listed entities could meet the definition of prohibited parties/sanctioned persons/restricted parties and the like. in many bank, insurance and other contractual provisions. Non-US person readers who engage in any trade involving NS-CMIC List entities (or affiliates) should therefore carefully check such provisions to ensure that they are not in breach of contract or have disclosure obligations (even in circumstances where there is no actual breach of the sanctions).

Key dates

The revised restrictions will come into effect on August 2, 2021 for the 59 companies currently on the NS-CMIC List, and US persons are allowed to divest holdings in those securities until June 3, 2022. Amended EO 13959 provides a 60-day period for the prohibitions to take effect with respect to entities not currently listed on the NS-CMIC List. It also provides for a 365-day divestment period for CMICs that will be designated in the future.17 The mere possession of restricted securities after the 365-day divestment period appears to be no longer prohibited. EO 14032 revoked in its entirety EO 13974 of January 13, 2021, which made certain amendments to EO 13959, including explicitly prohibiting the possession by US persons of securities in CCMCs following the expiration of the applicable 365-day divestment period.

In sum, the key timelines are as follows:

  • For any entity listed in the Annex to EO 13959, as amended, the prohibitions go into effect beginning at 12:01 a.m. eastern time on August 2, 2021.
  • For any entity not listed in the Annex to EO 13959, as amended, the prohibitions go into effect beginning at 12:01 a.m. eastern time on the date that is 60 days after the date the entity is listed on the NS-CMIC List.
  • Purchases or sales of publicly traded securities of CMICs listed in or pursuant to EO 13959, as amended, made solely to divest, in whole or in part, such securities by a US person are permitted until 12:01 a.m. eastern time on the date that is 365 days after the date the entity is listed in the Annex to EO 13959, as amended, or added to the NS-CMIC List.

We will continue to monitor these developments and provide updates as warranted.

Special thanks to Daniella Torrealba and Eddie Skolnick, who work under the supervision of Kim Caine, for their assistance in preparing this content.


2   US person is defined as any US citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

4   See FAQ 859: The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. 15 U.S.C. § 78c(a)(10).

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