What you need to know about the Chinese Anti-Foreign Sanctions Law

In response to increasingly targeted sanctions against Chinese entities or individuals by foreign countries, China recently adopted a new law to impose countermeasures. On 10 June 2021, the National People’s Congress of China published the Anti-Foreign Sanctions Law (AFS Law), which took effect on the same day. Considering the sensitive political nature of the law, it will cause long lasting impact on China’s foreign relations, especially in the trade and technology fields. While it is generally applicable to individuals and entities in all sectors, the AFS Law may have more obvious impact on players in the technology, financial and asset management, especially those multinational business undertakings active in the China market and those leading technology companies with multiple layered foreign investor background and/or foreign supply chains.

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Before the adoption of AFS Law, the Chinese Ministry of Commerce issued two department level regulations, ie Provisions on the List of Unreliable Entities (Entities List) and Measures for Blocking Improper Extraterritorial Application of Foreign Laws and Measures (Blocking Measures). The Entities List and Blocking Measures fall under administrative regulations, which are lower than national laws in terms of legal hierarchy in China. The AFS Law elevated the authority to the highest level under Chinese legal system. The AFS Law will be the legal basis for all national departments to implement countermeasures against foreign sanctions. The AFS Law will provide guidelines for the State Council to issue implementation rules.

Covered Actions

Under the AFS Law, when a foreign country, acting in violation of international law and basic international relations, adopts “discriminatory and restrictive” measures against Chinese citizen or China based organisation or interferes in China’s internal affairs, China shall have the right to implement countermeasures.

The scope of covered actions are quite extensive given the right to interpret “discriminatory and restrictive” measures is held by the Chinese government. Legislative, administrative, technological discrimination and restrictive measures adopted by foreign governments that target sensitive issues, such as human rights, sovereignty, internal affairs, territorial disputes may face countermeasures by China in accordance with this law.

In the international trade area, government denial of supply of key technology heavy materials without commercial justifications, eg chips, high tech equipment or machines, are also likely to face countermeasures from China in accordance with this law. In particular, some export control measures by foreign governments may be treated as “discriminatory and restrictive”.

On 16 July 2021, the US Treasury Department added seven senior Chinese central government officials in Hong Kong into the “specially designated nationals” list. One week later, the Chinese Foreign Ministry announced countermeasures against seven US individuals and entities in accordance with the AFS Law. This is the first case publicly available since the adoption of the AFS Law.

Countermeasures

The AFS Law has authorised the State Council to decide to include in a countermeasure list (Countermeasure List) the individuals or entities directly or indirectly involved in the development, decision-making, and implementation of the discriminatory restrictive measures by foreign countries. The Countermeasure List could also include spouse, immediate family members, senior officers or entities or organisations where these individuals serve as senior executives or actually control. The State Council will have the authority to determine the scope of covered entities or individuals on a case-by-case basis.

Once put on the Countermeasure List, the affected entities or individuals will essentially be denied access with China. The State Council could adopt one or multiple measures such as visa rejection, entry denial, deportation; freeze of movable or immovable assets in China; prohibition of business or cooperation with any China based individuals or entities. Further, there is a “catch all” clause where the State Council could determine for “all other necessary measures”.

These countermeasures are final and not subject to administrative or legal appeal procedures. Only the State Council can suspend, modify or remove the countermeasures due to “change of circumstances”. Our observation is that, unless the affected entities or individuals could provide to the State Council compelling evidence of their compliance of the AFS Law, it will be extremely difficult to challenge a decision made by the State Council under the AFS Law.

Legal Consequences

Entities and individuals in China should comply with the countermeasures issued by the State Council. Violations of the countermeasures will likely lead to penalties such as restriction or prohibition of business operation in China.

Entities and individuals should not implement or assist in the implementation of discriminatory restrictive measures adopted by foreign countries against Chinese citizens or China based entities. The affected Chinese citizens or China based entities may file actions to Chinese courts requesting injunction and compensation.

Under the Entities List a grace period may be granted; under the Blocking Measures certain exemptions may be granted, but the AFS Law itself does not explicitly refer to any grace period or exemption mechanism. Whether such mechanism will be available at implementation stage is unclear at the moment. As the AFS Law has granted authorisation to the State Council, the State Council can decide the exact implementation rules.

Impact on Business Undertakings

The AFS Law will likely cause big challenges for multinational business undertakings (MNC) with operation in China. MNCs have global compliance obligations. It is likely that the compliance of another government sanction will violate this Chinese AFS Law, and vice versa.

For financial and asset management sector entities, they are advised to review their global know your client (KYC) procedures and documentation, sanction screening policies against potential conflict with the AFS Law, and consider whether to make adjustment in respect of their China subsidiaries and/or businesses. For those which outsource anti-money laundering and/or KYC process to local fund administrators and distributors, they may also expect some pushbacks from the Chinese service providers. Certain carveouts or amendments to typical clauses and fund documents may be re-evaluated and re-negotiated.

MNCs that reply on commitment letters or liability exemption clauses of sanction compliance will need to revisit these documents, in particular with respect to undertakings, representations and warranties, and revise them to comply with the AFS Law. It is recommended for MNCs to consider building in contractual mechanisms such as if certain individuals or entities were added to the Countermeasures List during certain contract term, they are free to terminate the relationship without being liable for compensation.

Chinese technology companies are growing so fast and thriving globally. The AFS Law may impact on those foreign investors and/or foreign supply chain providers of these Chinese technology companies. This may cause significant disruption over normal operation, shareholder stability, future financing, IPO process, loss of market share and further. Therefore, Chinese technology companies are recommended to consider, among others, the AFS Law compliance, when for example attracting foreign investors or engaging foreign supply chain partners, and such impacts may go through multiple layers of shareholding or contract structuring. Sufficient due diligence, contractual rights to terminate and alternative supply chain sources are the typical factors to consider.

Although the AFS Law does not allow for appeal of the countermeasures imposed by the State Council, it is advisable to the affected MNCs to closely cooperate with the relevant State Council departments. An affected company could potentially reduce negative impact by proactively demonstrating its compliance of the AFS Law before the decision from the State Council is officially made. Even after the decision is effective, the parameters that the State Council determines for “change of circumstances” will likely help the affected company to seek removal from the Countermeasures List in accordance with the law in due course.