China Passes the Anti-Foreign Sanctions Law, Adding More Legal Tools to Countermeasure Foreign Sanctions and Interference

On 10 June 2021, China’s National People’s Congress (“NPC”) passed the Anti-Foreign Sanctions Law (“Law”) after just two readings of the previously unpublished draft. The Law takes effect immediately and provides a legislative authority for previous and existing countering measures taken by the Ministry of Foreign Affairs (“MFA”) and the Ministry of Commerce (“MOFCOM”).  The Law is an additional affirmation of legal authority to the previous promulgations of the Unreliable Entity List (“UEL Provisions”, see our alert here)and the Blocking Statute (see our alert here enacted by the Chinese government, which are intended as legal tools to respond to foreign sanctions that are determined to be harmful to China.

Summary of Key Provisions

When will the countermeasures be triggered?

Article 3.2 of the Law provides that China’s government is entitled to employ countermeasures wherever a foreign nation: (i) interferes with China's internal affairs; (ii) conducts discriminatory restrictive measures against Chinese citizens and organizations; and/or (iii) constrains or suppresses China under any kind of pretext or based on its national laws that results in a violation of the international law and basic norms of international relations.

Although the Law doesn’t specify whether these three conditions shall be satisfied concurrently or partially, the legislation intention appears to provide broad authorization for Chinese authority to take countermeasures when necessary, so the Chinese government is expected to adopt an expansive interpretation that could allow it to deploy countermeasures under any of the three circumstances.

Who could be the target of countermeasures?

Article 4 of the Law provides that the departments concerned of the State Council can decide to include any individuals and organizations that directly or indirectly participate in the formulating, decision-making, or implementing of the discriminatory restrictive measures (as provided in Article 3 of the Law) into the List.

While the Law does not define the “discriminatory restrictive measures,” foreign government officials and non-governmental organizations that provide substantial and essential support in assisting, implementing and facilitating the discriminatory restrictive measures against Chinse parties are apparently under the direct target of the Law.

In addition to the individuals and organizations to be designated on the List (“Listed Parties”), targets of countermeasures by the Law may also extend to their related parties (“Related Parties”), including: 

1. spouses and immediate relatives of individuals designated on the List;
2. senior managers or actual controllers of organizations designated on the List;
3. organizations in which any individual designated on the List serves as senior management; and
4. organizations controlled, established, or operated by subjects designated on the List.

Although the Related Parties need to be specifically named by the authority to be subject to certain countermeasures, the scope of potential targets under the Law apparently could be broader than those adopted by the UEL Provisions and the Blocking Statute, which are limited to the direct parties who take discriminatory measures against Chinese parties. 

What kind of countermeasures could be adopted?

According to Article 6 of the Law, the following countermeasures could be imposed on the Listed Parties and the Related Parties, which largely mirror the measures in the UEL Provisions:

1. Visa denial and cancellation, entry denial or deportation;
2. Sealing, seizing, or blocking movable property, real estate, and other types of property within the mainland China;
3. Prohibiting or restricting its relevant transactions, cooperation, and other activities with organizations and individuals within the mainland China; and
4. Other necessary measures.

In particular, the fourth item above appears to be a catch-all clause that provides broad discretion and power to Chinese authority to adopt countermeasures where necessary when foreign countries, organizations, or individuals implement, assist or support any actions endangering “China’s sovereignty, security, or development interests.”

The Legislative Affairs Commission of the NPC Standing Committee also confirmed that  the Law is supposed to be a “cohesive” and “compatible” provision which takes into consideration the existing countermeasures under the China’s Export Control Law, the UEL Provisions, and the Blocking Statute, and leave space for other countermeasures that might be released in the future. Depending on the circumstances change, the departments concerned of the State Council can suspend, change or revoke the related countermeasures.

Who could be held liable for not following the Law?

Organizations and individuals within the territory of mainland China (which includes any foreign entities established in China, such as foreign invested enterprises or representative offices of foreign organizations) are legally obliged to follow the countermeasures implemented by the departments concerned of the State Council.  For organizations and individuals in China that violate the provisions of the preceding paragraph, such as conducting transactions with Listed Parties and Related parties, the departments concerned of the State Council shall deal with them in accordance with the law and restrict or prohibit them from engaging in related activities. 

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.”

More expansively, Article 12 of the Law prohibits any organizations and individuals (meaning regardless domiciled within mainland China or not) from implementing or assisting in the implementation of discriminatory restrictive measures employed by foreign countries against Chinese citizens and organizations. Infringed Chinese parties may rely on the Law to initiate litigations in PRC courts requesting a cessation of the infringement and compensation of losses. Although the Blocking Statute establish a similar cause of action for Chinese parties to assert claims for damages caused by compliance with a targeted foreign law or regulation, but such relief is conditioned on a MOFCOM’s prohibition order against a specific foreign measure.  In this regard, without the prohibition order requirement, the Law could be arguably read to have set a lower bar for Chinese parties to seek damages through civil proceedings against infringing parties, which very much remain to be tested on how such civil rights be pursued in actual enforcement action and civil proceedings.

Legislation Background

The  Law was adopted just two days after it was made public to be under initial deliberations by the NPC Standing Committee, an unusual legislative move but not an unprecedented one. Normally laws are read three times by the NPC Standing Committee, so some legal observers expected the legislative draft to undergo a third review before it moves to the voting process. However, as a legal matter, consultation drafts that have been unanimously agreed by all members of the Standing Committee of the NPC during the second review are permitted to proceed directly to the voting stage. This expedited legislation process indicates the Chinese government’s eagerness to set the legal basis at the “law” level, in order to take countermeasures in response to recent intensive sanction measures that Chinese organizations and individuals are imposed by foreign countries.

Further Thoughts

Need further implementing rules and guidance

As reflected above, many of the provisions of the Law are ambiguous and need supplemental interpretations and further guidance. For example, the Law allows China to enact counter-sanction individuals or organizations that directly or indirectly implement “discriminatory restrictive measures”; however, there is no definition on “discriminatory restrictive measures”.  Also, for the countermeasures, it is not specified at this stage whether “other types of property” is meant to include “property interest.” The exact definition of “relevant transaction” that parties are restricted or prohibited from engaging if violating the Law is not clear either. By applying “relevant transactions” instead of “all transactions”, the Chinese government seemingly aims to prohibit, if not all transactions with entities be countered, at least activities closely linked to or providing support for discriminatory restrictive measures.

Interplay of the Law, the UEL Provisions, and the Blocking Statute

Over the past year, MFA and MOFCOM have sanctioned a few foreign individuals and organizations.  However, the specific legislative basis or legal authority for these individual sanctions announcements and the Blocking Statute were very vaguely referenced.  The new Law creates the legal basis and provides the legislative authority for existing sanction and countering measures.

Article 13 of the Law reads that for conducts endangering China's sovereignty, security, or development interests, other necessary countermeasures in addition to those under the Law may be introduced in form of laws, administrative regulations, and departmental rules by relevant authorities. It is perceived as a formal authorization to cover the promulgated rules such as the UEL Provisions and Blocking Statute by the MOFCOM and also to provide legal basis for any future sanction measures.

Though the Law shares certain sanction or countering measures in common with the UEL Provisions or the Blocking Statute, the three sets of legal provisions each has its own restricted control list, distinct criteria in designating foreign parties, removal and rectification procedures (if available) and different legal implications of the sanction measures. 

With the sanction regimes on the China side getting more and more complicated, companies, in particular those multinational corporations, that have both substantial operation in China and foreign countries may run into a dilemma in how to balance and navigate the conflicting measures and countermeasures of its own nation and China.  We propose a few preliminary recommended actions as follows that companies may consider taking alongside the evolving dynamics.

Recommendations

First, companies should watch closely the regulatory developments of Chinese countermeasures legislation and any enforcement actions under these laws given the level of ambiguity and need of further implementation guidance to provide more clarity.

Second, companies should carefully review the sanctions and export control provisions in the contract and assess whether to update the terms. Efforts to invoke terms such as sanctions-related compliance terms as a basis to terminate the contract might be viewed as “assisting” in the implementation of foreign sanctions against Chinese parties under an expansive reading of the Law.  

Third, if a business contract or project would have significant impact on Chinese parties or involves business partners who are or will be potentially targeted on the foreign restricted control lists, companies are encouraged to conduct enhanced risk assessment before taking any suspension or termination action with its business partners, and consider developing contingency plan or alternatives to balance the interests and legal risks of both foreign laws and Chinese laws.

Authored by: Roy Zou, Sherry Gong, Ben Kostrzewa, Stephanie Sun, Min Chen, Flora Feng.