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Lettre d'information - Chine
Enterprises Operating in/with China : sanctions
29/01/2025

1.       Law of the People’s Republic of China on Anti-Foreign Sanctions

The Law of the People’s Republic of China on Anti-Foreign Sanctions (“Anti-Foreign Sanctions Law”) was adopted by the 29th meeting of the Standing Committee of the 13th National People’s Congress on June 10, 2021, and came into force on the date of its promulgation. According to Article 3 of the Anti-Foreign Sanctions Law, if a foreign state violates international law and the basic norms of international relations, uses various pretexts or its own laws to contain or suppress China, takes discriminatory restrictive measures against its citizens or organizations, and interferes in the internal affairs of China, China has the right to take corresponding countermeasures. As can be seen from the conditions of application, the law is more of a political and principled approach, setting out a framework and providing guidelines.

Specific elements of countermeasures

In accordance with Articles 4 and 5 of the Anti-Foreign Sanctions Law, countermeasures are applied to individuals and organizations (included in the countermeasures list) that are directly or indirectly involved in formulating, deciding on, or implementing discriminatory restrictive measures, as well as to their spouses, immediate family members, senior managers, or de facto controllers etc.. Countermeasures include, but are not limited to:

  • Denial of visa, denial of entry, cancellation of visa or expulsion from the country;
  • Seizure, attachment and freezing of movable and immovable property and other types of property within the territory of China;
  • Prohibiting or restricting organizations and individuals in China from engaging in relevant transactions, cooperation and other activities with them;
  • Other necessary measures.
Implementation and accountability

It goes without saying that under the system of the Anti-Foreign Sanctions Law, entities and individuals included in the countermeasures list are subject to the aforementioned sanctions. It is important to note that, under the Anti-Foreign Sanctions Law, organizations and individuals in China shall implement the countermeasures taken by the competent Chinese authority (Article 11), and no organization or individual may implement or assist in the implementation of discriminatory restrictive measures taken by foreign States against Chinese citizens or organizations (Article 12). Organizations and individuals that violate the regulations will face the following legal liabilities: (1) administrative liability, i.e., they will be restricted or prohibited from engaging in the relevant activities by the competent authorities (Article 11); (2) civil tort liability, if the implementation of, or assistance in the implementation of, discriminatory restrictive measures taken by a foreign country against a Chinese citizen or organization causes an infringement on the latter, the infringed party may, in accordance with the law, file a lawsuit in the People’s Court to demand that the infringement be stopped and to claim compensation for damages (Article 12).

Examples of foreign enterprises penalized under China’s Anti-Foreign Sanctions Law

In connection with issues such as military assistance to China’s Taiwan region, the Ministry of Foreign Affairs of China has placed a number of United States enterprises on the countermeasures list under the Anti-Foreign Sanctions Law. For example, according to the Decision of the Ministry of Foreign Affairs of December 27, 2024 on Countermeasures against U.S. Military Industrial Companies and Senior Executives, Insitu, Inc., Hudson Technologies Co., Saronic Technologies, Inc., Raytheon Canada, Raytheon Australia, Aerkomm Inc., Oceaneering International, Inc. etc. were placed on the countermeasures list.[1]

Comments and recommendations

Given its political and framework nature, the Anti-Foreign Sanctions Law itself leaves much room for uncertainty and interpretation. For example, in terms of the conditions for its application, it is not clear what “discriminatory restrictive measures” can be characterized as “foreign countries interfering in the internal affairs of China by using various pretexts or their own laws to suppress and oppress China, and by taking discriminatory restrictive measures against its citizens and organizations in violation of international law and the basic norms of international relations”. Whether “discriminatory restrictive measures” include the series of U.S. sanctions and restrictive measures against China, such as the Uyghur Forced Labor Prevention Act, the Hong Kong related sanctions, the China Military-Industrial Complex (CMIC) sanctions, and whether they cover the lists or specific penalties in the area of U.S. export control, etc., are all questions that remain to be seen.

In the case of European enterprises operating in or with China, if they are legal persons under Chinese law registered in China, they are obliged to implement the countermeasures imposed by the competent Chinese authorities and may not implement or assist in the implementation of discriminatory restrictive measures taken by foreign States against Chinese citizens and organizations. For example, they may not unilaterally terminate the trading relationship with a subject in China to the detriment of its legitimate rights and interests for the sole purpose of fulfilling the U.S. sanction programs. Otherwise, they may face tort and breach of contract liabilities. Specifically, sanction compliance and unilateral termination clauses, which have become more common in recent years in the general terms and conditions commonly used by European enterprises at the group level, may face legal risks of invalidity and liquidated damages if they are directly applied to the context of Chinese subsidiaries.

Even if for European enterprises that are purely foreign enterprises registered outside of China, it should be noted that the extraterritorial effect of the Anti-Foreign Sanctions Law requires foreign enterprises to avoid implementing or assisting in the implementation of “discriminatory restrictive measures”. Failure to comply with this provision may, in theory, result in the risk of being sued for damages. Of course, such liability is premised on the injured party filing a claim with the competent adjudicating authority, and the possibility of actual enforcement depends mainly on whether the foreign enterprise has enforceable assets in China.

2.       Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures

The Measures for Blocking Improper Extraterritorial Application of Foreign Laws and Measures (the “Blocking Measures”) were published by Decree No. 1 of the Ministry of Commerce (“MOFCOM”) on January 9, 2021, and came into force on the same day. It is an administrative regulation. The main contents include the following aspects:

Scope of application

The Blocking Measures apply to the circumstances of extraterritorial application of foreign laws and measures, which violates international law and the basic norms of international relations by unreasonably prohibiting or restricting Chinese citizens, legal entities or other organizations from engaging in normal economic, trade and related activities with third countries (regions) and their citizens, legal entities or other organizations (Article 2).

Working mechanisms

The State establishes a working mechanism, with the participation of relevant departments of the central State, responsible for responding to the improper extraterritorial application of foreign laws and measures. The working mechanism will assess and confirm whether there is improper extraterritorial application of foreign laws and measures, taking into account various factors (Article 6).

Reporting obligations

If a Chinese citizen, legal person or other organization encounters foreign laws and measures prohibiting or restricting its normal economic, trade and related activities with a third country (region) and its citizens, legal persons or other organizations, it shall, within 30 days, report the situation to the MOFCOM. If the person making the report requests confidentiality, the authority and its staff shall maintain confidentiality for him or her (Article 5).

If the assessment confirms that the foreign laws and measures in question have been improperly applied extraterritorially, the working mechanism may decide that the MOFCOM shall issue an injunction (Article 7). Chinese citizens, legal persons or other organizations may apply to the authority for exemption from the injunction.

Judicial remedy

There are two main situations in which judicial remedies and civil compensation may occur under the Blocking Measures. First, if a party’s compliance with foreign laws and measures within the scope of the injunction infringes on the lawful rights and interests of a Chinese entity (including citizen, legal person or other organization), the Chinese entity may, in accordance with the law, file a lawsuit in the People’s Court to demand that party to pay compensation for the loss; second, if a judgment or ruling made under a foreign law within the scope of the injunction results in a loss to a Chinese entity, the Chinese entity may, in accordance with the law, file a lawsuit in the People’s Court to demand that the party that has benefited from the judgment or ruling compensate the loss (Article 9).

As of today, there are no public reports indicating that MOFCOM has issued a specific injunction under the Blocking Measures.

3.       Unreliable Entity List Provisions

The Provisions on the List of Unreliable Entities were promulgated by Decree No. 4 of the MOFCOM on September 19, 2020, and came into effect on the same day. It is an administrative regulation. The main contents include the following aspects:

Applicable objects and acts

The State establishes a system of lists of unreliable entities, and takes corresponding measures against foreign entities (including foreign enterprises, other organizations or individuals) for the following actions in international economic and trade and related activities: actions that endanger China’s sovereignty, security or development interests; actions that violate normal market trading principles, disrupt normal trading with Chinese enterprises, other organizations or individuals, or take discriminatory measures against them, seriously damaging their legitimate rights and interests (Article 2).

Investigations and announcements

A multisectoral working mechanism established under the State Council decides ex officio, or on the basis of suggestions or reports from the parties concerned, whether or not to conduct an investigation into the acts of the foreign entity in question. The investigation may take the form of questioning the parties concerned, inspecting or copying relevant documents and information, and other necessary means. During the investigation, the foreign entity concerned may make statements and plead its case (Article 6). If, after investigation, the working mechanism decides to include the investigated entity in the list of unreliable entities, it shall make a public announcement (Article 8).

Consequences of listing

Restrictive measures that may be imposed on foreign entities included in the list of unreliable entities include: restricting or prohibiting them from engaging in China-related import and export activities; restricting or prohibiting them from investing in China; restricting or prohibiting the entry of their relevant personnel and means of transportation into the country; restricting or revoking the qualifications of their relevant personnel for work permits, stays or residences in China; and imposing fines of an appropriate amount in accordance with the gravity of the circumstances etc. (Article 10).

Cases
  1. Boeing Defense, Space & Security (USA), General Atomics Aeronautical Systems (USA), General Dynamics Land Systems: on May 20, 2024, was added to the MOFCOM’s list of unreliable entities for its involvement in arms sales to Taiwan.[2]
  2. The Working Mechanism issued a public announcement on September 24, 2024, deciding to commence the investigation against the U.S. PVH Group for the possible existence of discriminatory measures against the products involved in Xinjiang Area.[3]

Summary of legal risks for European companies under the PRC’s anti-foreign sanctions regime

The Anti-Foreign Sanctions Law was enacted after the Provisions on the List of Unreliable Entities and the Blocking Measures and is a higher-order law, in terms of hierarchy of effect. However, due to the nature of the higher-order law, it requires a lower-order administrative regulation to implement its contents. Therefore, the parallelism of the three pieces of legislation is likely to continue. On a practical level, after the introduction of the Anti-Foreign Sanctions Law, the MOFCOM still carries out investigations and publishes lists in accordance with the Provisions on the List of Unreliable Entities, which also validates the aforementioned analysis. Comparing the three pieces of legislation in detail, we can see the different risks that European companies’ subsidiaries in China or European companies themselves may face as follows:

 Anti-Foreign Sanctions LawBlocking MeasuresProvisions on the List of Unreliable Entities
Applicable conditionsA foreign State: violates international law and the basic norms of international relationssuppress China by using various pretexts or in accordance with its own national lawstakes discriminatory and restrictive measures against Chinese citizens and organizationsinterferes in the internal affairs of ChinaThe extraterritorial application of foreign laws and measures: violates international law and the basic norms of international relationsunduly prohibits or restricts Chinese citizens, legal persons or other organizations from engaging in normal economic, trade and related activities with third countries (regions) and their citizens, legal persons or other organizationsForeign entities (including organizations and individuals): jeopardize China’s national sovereignty, security and development interestsviolate the principle of normal market transactions, interrupt normal transactions with Chinese entitiestake discriminatory measures against Chinese entitiesthereby seriously harming the legitimate rights and interests of Chinese entities
Objects of punishmentIndividuals and organizations directly or indirectly involved in the formulation, decision or implementation of discriminatory restrictive measures. The aforementioned foreign entities
Form of official Chinese documentsList of countermeasuresInjunctionsList of unreliable entities
Specific measuresFor organizations, individuals and their executives, etc., on the countermeasures list: Prohibition of entering ChinaSeizure of assetsProhibition of tradingNon-recognition, non-enforcement and non-compliance with relevant foreign laws and measuresFor entities on the list of unreliable entities: Restrict or ban trade with ChinaRestrictions or prohibitions on investment in ChinaProhibition of entering and working in China etcFineOther necessary measures
Obligations and responsibilities of European companies’ subsidiaries in ChinaImplementation of countermeasures imposed by the competent Chinese authoritiesShall not enforce or assist in the enforcement of discriminatory restrictive measures taken by foreign States against Chinese citizens and organizations.Non-recognition, non-enforcement and non-compliance with relevant foreign laws and measures specified in the injunction 
Corresponding legal responsibilitiesAdministrative responsibility: order to restrict or prohibit the exercise of the relevant activitiesCivil liability: tortious liability to third parties and liability for breach of contractAdministrative responsibility: warning, order to correct, fineCivil liability: Compliance with foreign laws and measures within the scope of the injunction results in liability for compensation to Chinese entities that have suffered damage; if a judgment or decision made under a foreign law within the scope of the injunction benefits an European entity, the injured Chinese entity may request compensation from it. 
Obligations of the European enterprise (registered in the EU country) Avoidance of enforcement, assistance in “discriminatory restrictive measures”  
Corresponding legal responsibilities(Theoretically) civil liability: tortious liability to third parties and liability for breach of contract  
Circumstances to be clarifiedWhat is the scope of “discriminatory restrictive measures”?Are foreign legal entities required to comply with the regulation, and does it create liability? 
RecommendationsNot advisable to unilaterally terminate trading relations with subjects in China for the sole purpose of fulfilling US sanction lawsThe applicability of the Group’s general trading terms and conditions to its subsidiaries in China should be studies carefully. Compliance clauses designed to fulfill the U.S. sanction or export control obligations could lead to compensation claims under Chinese law. Therefore, such clauses need to be carefully designed.

[1] https://www.mfa.gov.cn/web/wjb_673085/zfxxgk_674865/gknrlb/fzcqdcs/202412/t20241227_11520050.shtml

[2] http://m.mofcom.gov.cn/article/zcfb/zczxzc/202405/20240503510684.shtml

[3] http://www.mofcom.gov.cn:8080/zcfb/zc/art/2024/art_5148fedb0a9545e2b61c07d5b94678e3.html

Read more in the same newsletter :

  1. https://adaltys.com/enterprises-operating-in-with-china-export-control/
  2. https://adaltys.com/enterprises-operating-in-with-china-trade-remedy-measures/

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