China’s New Anti-Foreign Sanctions Law: Narrowing straits?

On June 10, 2021, the Standing Committee of the National People’s Congress (NPC) adopted the Anti-Foreign Sanctions Law of the PRC ¹. Beyond providing clear authority for previous countermeasures against foreign sanctions announced by the Ministry of Foreign Affairs (MOFA) and the Ministry of Commerce (MOFCOM), the new law dramatically expands the potential regulatory penalties and civil liabilities for foreign persons acting contrary to Chinese national interests. Depending on the scope of its future interpretation and enforcement, the Anti-Foreign Sanctions Law may further complicate efforts to steer between foreign sanctions and Chinese countermeasures.

Legislative context

The previously-unpublished legislation was enacted after just two readings (as opposed to the normal three readings), and took immediate effect. This timing likely reflects Chinese policymakers’ intention to provide more concrete defensive support for Chinese subjects of foreign sanctions; it may also reflect confidence in the dynamism and magnitude of China’s domestic markets, and an expectation that the threat of excluding foreign companies may deter the implementation of further sanctions. The NPC’s action follows a year-long overhaul of China’s regulatory framework for enacting economic sanctions and export controls and countermeasures against foreign sanctions targeting Chinese persons.

• From mid-2020 to early 2021, the MOFA announced various sanctions against foreign individuals and organizations (see our summary here).
• In September 2020, the MOFCOM established formal mechanisms for sanctioning foreign entities and individuals designated as “unreliable” through the Provisions on the Unreliable Entity List (Unreliable Entity List)² (see our summary here);
• In October 2020, China established its first comprehensive export control framework with the passage of the Export Control Law (ECL)³ (see our summaries here and here);
• In January 2021, the MOFCOM created a framework for “blocking” foreign sanctions and export controls against Chinese interests through the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (Blocking Rules)⁴ (see our summary here);
• In April 2021, the MOFCOM issued the Guiding Opinions on Establishing the Internal Compliance Mechanism for Export Control by Exporters of Dual-use Items (2021 Guiding Opinions) along with the Dual-Use Item Export Control Internal Compliance Guidelines (ECC Guidelines), including detailed recommendations for internal policies and procedures to prevent, detect, and remediate ECL violations (see our summary here).

Some commentators have questioned the specific legislative basis for individual sanctions announcements and the Blocking Rules. The new Anti-Foreign Sanctions Law focuses on substantially the same policy issues and tools as recent actions by the MOFCOM and the MOFA, confirming the legislative authority for existing measures and allowing room for expanded action in the future.

Summary of key provisions

Policy Statement

Articles 1 and 2 restates the Chinese government’s policy of supporting “five principles of mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence” and other tenets of the United Nations and international legal system. Article 3 then articulates the policy of opposing foreign interference in Chinese internal affairs and asserting the right to respond to such interference. It states: “[t]he People's Republic of China opposes hegemonism and power politics, and opposes any country's interference in China's internal affairs under any pretext and in any way. If a foreign country violates international law and basic norms of international relations, uses various excuses or in accordance with its own laws to suppress [China], or adopt discriminatory restrictive measures against Chinese citizens and organizations, or interfere with [China’s] internal affairs, [China] has the right to take corresponding countermeasures.”⁵

Creation of Anti-Sanctions List

Article 4 provides that “relevant departments of the State Council may decide to include individuals and organizations that directly or indirectly participate in the formulation, decision, and implementation of the discriminatory restrictive measures stipulated in Article 3 of this law on an Anti-Sanctions List.”

The Anti-Foreign Sanctions Law itself does not include or append the Anti-Sanctions List or provide further direction on its publication. These provisions may be broadly read as confirming the unreliable entities list and the MOFA’s sanctions announcements, and as authorizing broader lists in the future.

Sanctions on Affiliated Persons

Article 5 provides that in addition to including persons directly designated on the Anti-Sanctions List, countermeasures may also be applied to: “(1) spouses and immediate family members of individuals included in the Anti-Sanctions List; (2) senior managers or actual controllers of organizations included in the Anti-Sanctions List; (3) organizations where individuals included in the Anti-Sanctions List serve as senior management personnel; and (4) organizations that are actually controlled by the individuals or organizations included in the Anti-Sanctions List or organizations where such the individuals or organizations participated in the establishment or operation.”

These provisions are consistent with the scope of sanctions announced by the MOFA.

Sanctions Menu

Article 6 provides a non-exhaustive menu of potential sanctions, including: “(1) refusal to issue visas, deny entry, visa cancellation or deportation; (2) sealing up, seizing, and freezing movable property, immovable property and other various types of property within the territory of [China]; (3) prohibit or restrict relevant transactions, cooperation and other activities with organizations and individuals within the territory of [China]; and (4) other necessary measures.”

Travel and transactional restrictions appear in recent MOFA sanctions announcements and as potential sanctions on parties designated on the unreliable entity list and or subject to restrictions under the Export Control Law. Although the practice of “freezing” the assets of foreign sanctions targets is well established under the US sanctions regime, the explicit threat of seizing or freezing property does not explicitly appear in the Unreliable Entity List, the ECL, or recent MOFA sanctions announcements. The Anti-Foreign Sanctions Law provides no further guidance on the mechanisms for asset freezes.

Non Justiciability

Article 7 declares that “the decision made by the relevant departments of the State Council in accordance with the provisions of Articles 4 to 6 of this Law shall be final.” On its face, this provision appears to exclude recourse to judicial challenges under measures such as the Administrative Litigation Law.⁶ (This measure may have been informed by US laws limiting judicial challenges to certain executive actions involving foreign policy and national security issues).

Modifications

Articles 8 and 9 authorize the relevant departments of the State Council to suspend, modify, or cancel countermeasures in response to changed circumstances, and require public announcements of such actions.

Mandatory Implementation of Chinese Countermeasures

Article 11 declares that implementation of any government countermeasures against foreign sanctions measures shall be compulsory. It provides: “[o]rganizations and individuals within the territory of [China] shall implement countermeasures adopted by relevant departments of the State Council. For organizations and individuals that violate the provisions of the preceding paragraph, the relevant departments of the State Council shall deal with them in accordance with the law and restrict or prohibit them from engaging in related activities.” Depending on the scope of countermeasures enacted by the government, the obligation to comply may have far-reaching effects.

Article 14 further provides that “any organization or individual who fails to implement or cooperate with the implementation of countermeasures shall be investigated for legal responsibility in accordance with the law.”

Prohibition of Compliance with Discriminatory Foreign Measures

Article 12 provides that “no organization or individual may implement or assist in the implementation of any discriminatory restrictive measures taken by foreign countries against Chinese citizens and organizations.” It further provides that “where organizations and individuals violate the provisions of the preceding paragraph and infringe upon the lawful rights and interests of Chinese citizens and organizations, Chinese citizens and organizations may file a lawsuit with the people’s court in accordance with the law, requesting them to stop the infringement and compensate for the losses.”

Significantly, the text of Article 12 does not further define the scope of “discriminatory restrictive measures taken by foreign countries against Chinese citizens and organizations” or the scope of conduct constituting “implementation: or “assistance in implementation.”

For comparison, the Blocking Rules enacted by MOFCOM similarly establish a private cause of action for Chinese parties. However, MOFCOM must first publish a “prohibition order” against a specific foreign measure before parties may assert claims for damages cause by compliance with a foreign measure in violation of a prohibition order.  

It is possible that Article 12 of the Anti Foreign Sanctions Law may be formally implemented through the existing Blocking Rules or other measures in which the MOFCOM, the MOFA, or other authorities serve as gatekeepers to the courts by identifying discriminatory foreign measures and defining actionable “assistance” in implementation. On its face, however, Article 12 might be construed more broadly, potentially allowing Chinese parties to sue for damages whenever counterparties alter or exit existing arrangements or abstain from new transactions to avoid either direct liability under foreign measures or the indirect reputational risks of technically permissible dealings with the targets of foreign measures.

Potential Extraterritorial Effect

When Chinese laws and regulations have extraterritorial effect, they generally include an explicit statement that of “applicability” to conduct outside Chinese territory in specific circumstances. The Anti Foreign Sanctions Law does not contain a statement of “application” to offshore conduct. However, Article 15 provides that: “[f]or foreign countries, organizations, or individuals that implement, assist, or support acts that endanger [China's] sovereignty, security, and development interests and where countermeasures are necessary to be taken, refer to the relevant provisions of this law.” Article 15 might be construed simply to authorize foreign parties to be designated in the Anti-Sanctions List and subjected to travel restrictions, asset freezing, and other measures within China as a consequence of their foreign conduct.  However, Article 15 might also be read expansively to allow claims under Article 12 arising from a wide range of offshore conduct by private parties pursuant to foreign laws deemed “discriminatory restrictive measures taken by foreign countries against Chinese citizens and organizations.” Examples might range from cancellation by third-country companies of U.S. dollar transactions with Chinese suppliers or customers subject to the US sanctions, the forced unwinding of joint ventures with sanctioned Chinese partners, or the withdrawal from investment transactions to avoid exposing US investors to the securities of firms designated by the US as Chinese Military Industrial Companies. Chinese policymakers have historically been cautious in authorizing private claims arising from foreign conduct, but the text of Article 15 leaves the door open.

Interagency Coordination

Article 10 directs the relevant departments of the State Council to coordinate their anti-Sanctions activities through a work-coordination mechanism. Existing measures similarly call for coordination among ministries and commissions. In practice, the MOFA and the MOFCOM are likely to retain pivotal roles in the Chinese government’s response to foreign sanctions and export controls. However, private claims for damages from compliance with foreign sanctions under Article 12 would also implicate the courts.

Implications

The Anti-Foreign Sanctions Law amplifies the risk to foreign companies, organizations, and individuals that direct involvement with foreign legislative, regulatory, and social activities inimical to Chinese national interests may jeopardize travel, commercial dealings, and assets in China, for themselves and for affiliated entities and individuals.

But for many firms active in trade and investment with China, the chief risk under the new Anti-Foreign Sanctions Law may be the further narrowing of courses for navigating between conflicting measures and countermeasures from Washington and Beijing. Contracts governing a wide range of commercial activities—from major M&A transactions to startup financings, from professional services agreements to routine sales of goods, from patent licenses to underwriting agreements—routinely incorporate elaborate terms addressing sanctions and export control compliance. Some provisions allow termination or modification of arrangements only when continued implementation would cause a contracting party to violate an applicable sanctions or export control rule; others are more conservative, allowing exits when continued implementation would raise reputational risks of affiliation with sanctioned parties. Under Anti-Foreign Sanctions Law, efforts to invoke such contract terms might be viewed as “assisting” in the implementation of foreign sanctions against Chinese parties, risking administrative action under Article 11 and private litigation under Article 12. Even if the relevant agreements contain choice of law and choice of forum terms designating foreign jurisdictions, enforcement of sanctions and export control compliance terms might nonetheless be actionable in China under a broad reading of Article 15.

For multinational companies active in China or dealing with Chinese counterparties, the Anti-Foreign Sanctions Law  underscores the need for circumspect review of existing contracts and contingency plans. The straits between foreign sanctions, export controls, and other restrictions and Chinese countermeasures may be narrowing.

¹ Zhong Hua Ren Min Gong He Guo Fan Wai Guo Zhi Cai Fa (《中华人民共和国反外国制裁法》) (Anti-Foreign Sanctions Law of the People’s Republic of China) (promulgated by the Standing Committee of the National People’s Congress, June 10, 2021 with immediate effect), (Ch.) See also the accompanying press conference Q&A by the Head of the Legal Work Committee of the Standing Committee of the National People's Congress (Ch.)

² Bu Ke Kao Shi Ti Qing Dan Gui Ding (《不可靠实体清单规定》) (Provisions on the Unreliable Entity List (promulgated by the Ministry of Commerce on September 19, 2020 with immediate effect), (Ch.)

³ Zhong Hua Ren Min Gong He Guo Chu Kou Guan Zhi Fa (《中华人民共和国出口管制法》) (Export Control Law of the People’s Republic of China (promulgated by the Standing Committee of the National People’s Congress), Oct. 17, 2020, effective Dec. 1, 2020), (Ch.)

⁴ Zu Duan Wai Guo Fa Lv Yu Cuo Shi Bu Dang Yu Wai Shi Yong Ban Fa (《阻断外国法律与措施不当域外适用办法》) (Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures) (promulgated by the Ministry of Commerce on January 9, 2021 with immediate effect), (Ch.)

⁵ Several sections of the Anti-Foreign Sanctions Law refer to China as “our country.” Translated excerpts in this article use the term “China” in brackets.

⁶ Zhong Hua Ren Min Gong He Guo Xing Zheng Su Song Fa (《中华人民共和国行政诉讼法》) (Administrative Litigation Law of the People’s Republic of China) (promulgated by the Standing Committee of the National People’s Congress), June 27, 2017, effective on June 1, 2017), (Ch.)