China's Newest Anti-Foreign Sanctions Blocking Law: What We Know, What We Don't Know, and What U.S. Companies Can Do

On June 10, 2021, the Standing Committee of the National People's Congress of China (SCNPC) enacted the Anti-Foreign Sanctions Law (AFSL). The AFSL is the third in a series of anti-foreign sanctions blocking laws (collectively, the "Blocking Laws") recently issued by the People's Republic of China (PRC) to protect China's sovereignty, security, internal affairs, and development interests by countering foreign sanctions—particularly U.S. sanctions—on targeted Chinese businesses and individuals.

According to the legislation, the AFSL grants the PRC the right to take corresponding countermeasures "if a foreign country violates international law and basic norms of international relations…, or adopt[s] discriminatory restrictive measures against Chinese citizens and organizations, and interfere[s] in [the PRC]'s internal affairs." The broad language of the AFSL suggests the willingness of the PRC to adopt "other necessary countermeasures for acts that endanger China's sovereignty, security, and development interests."

Beyond the laws themselves, little guidance has been provided by the PRC regarding how the Blocking Laws will be enforced by the Chinese government and effectuated through the private rights of action the laws create. While this makes it difficult for multinational companies doing business in China—who are now caught in the crossfire of U.S. sanctions and Chinese Blocking Laws—to know how to respond, we offer the below strategies for consideration. Whether, and to what extent, such defensive measures will be effective remains to be seen.

China's Newest Blocking Law

Blocking laws aimed at diminishing the effectiveness and impact of U.S. trade sanctions are not new. The European Union previously issued such laws, hoping to lessen the impact of U.S. secondary sanctions on EU companies. But those laws, despite recent efforts to strengthen them, have done little to restrain the U.S. government's assertion of extraterritorial jurisdiction over EU businesses and citizens (see our prior client advisory).

The AFSL builds on, and expands the scope of, China's two earlier Blocking Laws in two ways. First, the law expands on an existing private right of action, granted to Chinese citizens and organizations, to sue in court for damages when they claim to have been injured by foreign sanctions. Second, the AFSL allows the Chinese government to create a "Counter-Control List" aimed at individuals and organizations directly or indirectly involved in "discriminatory restrictive measures" against the PRC, listing several restrictions—such as denying visas or freezing assets—that will apply to persons placed on the list.

It remains to be seen how, and how aggressively the PRC intends to enforce the Blocking Laws—including the AFSL, and whether Chinese persons who claim to be injured by the application of foreign sanctions will avail themselves of private rights of action, as provided for in AFSL Article XII. It is also unclear whether these laws are intended merely as political retort to U.S. trade sanctions against China or will be enforced through concrete retaliatory actions aimed at the United States' broad exercise of extraterritorial jurisdiction.

AFSL Expansion of Prior Blocking Laws

The first order enacted by the PRC was the Provisions of the Unreliable Entity List (PUEL), an export controls framework that was issued by the Ministry of Commerce of China (MOFCOM) in September 2020. Months later, in January 2021, MOFCOM issued the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (Extra-territorial Rules), a sanctions blocking framework.

The AFSL expands the scope of the two prior Blocking Laws. First, it enhances a private right of action for Chinese citizens and organizations who claim to have suffered injury from the application of foreign sanctions against them. The law states that where the rights and interests of Chinese citizens and organizations are infringed as a result of a company's compliance with foreign sanctions, they may sue the company in Chinese court to enjoin the infringement and obtain damages for their losses.

While the Extra-territorial Rules also included a private right of action, it was aimed at prohibiting compliance by Chinese citizens and organizations with extraterritorial application of foreign law that the PRC deems unjustifiable, based on factors included in the law (including whether (i) it violates international law and the basic norms of international relations, (ii) the possible impact on China's national sovereignty, security, and development interests, and (iii) the possible impact on the legitimate rights and interests of Chinese citizens, legal persons or other organizations).

Chinese citizens and organizations may apply for exemptions from compliance with the provisions of the Extra-territorial Rules, and if they are granted an exemption, may not be sued in court where a Chinese party asserts its private right of action as outlined in the Extra-territorial Rules. On the other hand, the AFSL's language does not include any such provision for exemptions from liability for claims asserted by Chinese citizens and organizations.

Second, the AFSL indicates that "[r]elevant 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 the counter-control list."¹ The AFSL also includes specific restrictions that the listed classes of organizations and individuals face, as outlined in the succeeding paragraphs.

Who Is Targeted by the New Law

The three Blocking Laws are similar in purpose, aiming to counter the enforcement of foreign sanctions laws that allegedly discriminate against Chinese citizens and organizations. However, only the AFSL specifically calls out classes of individuals or organizations directly involved in taking or implementing discriminatory actions or measures against Chinese citizens or entities, placing them on a Counter-Control List.

In addition to these classes of organizations and individuals, the AFSL Counter-Control List includes:

• (1) Individuals' spouses and immediate relatives;
• (2) Senior managers or controllers of listed organizations;
• (3) Organizations with senior management listed as individuals on the counter-control list; and
• (4) Organizations that are actually controlled or participated in the establishment and operation of individuals and organizations included in the counter-control list.

As written, the law could apply to a broad range of organizations and individuals, whether they are directly or indirectly involved in, or associated with, those participating in discriminatory actions against PRC citizens and entities.

Types of Restrictions Imposed by the AFSL

Parties placed on the Counter-Control list face a variety of restrictions. They may be denied entry into China or face deportation. Their visas may be denied or cancelled. Their assets may be seized or frozen.

They could also face restrictions on business activity within China, in addition to facing restrictions or prohibitions on transactions conducted with other entities or individuals within Chinese territory. The law also mentions any "other necessary measures," providing for a broad range of potential limitations that could be imposed on individuals and organizations on the counter-control list.

Implications—What Companies Should Know

The implications for multinational companies doing business in China are currently unclear due to the novelty of the law, the fact that the PRC has yet to issue guidance on enforcement mechanisms and intentions, and the fact that government enforcement proceedings and private lawsuits, if any, have not yet progressed to completion.

Given the emerging and developing nature of the AFSL and the two prior Blocking Laws, it is perhaps too soon to know what strategies U.S. companies that do business in China should follow to be able to continue to comply with U.S. (and EU) sanctions to which they are subject without making themselves vulnerable to suit or enforcement proceedings under the PRC's Blocking Laws.

But there are some possible strategies that such companies can consider even at this early stage, depending on the particular facts and circumstances in which they find themselves:

• In all cases, continue to comply with U.S. sanctions, as the United States is not likely to accept compliance with the Blocking Laws as a defense to alleged violation of U.S. sanctions.
• Seek to include in contracts with Chinese counterparties a provision that U.S. law governs, including in the event of a conflict between U.S. and another country's laws.
• Attempt to include in new contracts, and where possible re-negotiate existing agreements to include, provisions that make arbitration subject to international laws and international tribunals' jurisdiction the exclusive remedy for all disputes concerning the contract (including those relating to, or arising from, sanctions).
• Decline to agree to contractual provisions that permit non-performance by Chinese counterparties based on the U.S. company's inclusion on the Counter-Control List.
• Include contract penalties for breach of contract obligations by Chinese counterparties, even where the failure to fulfill contract obligations purportedly is caused by the Blocking Laws.
• Carefully track pronouncements from, and actions by, the respective Chinese agencies concerning the three Blocking Laws to identify enforcement priorities of the Chinese government, the actual exercise of private rights of action by Chinese businesses and individuals, and the nature of any defenses that are recognized by Chinese courts to the enforcement of the Blocking Laws.

It is unclear whether, or to what extent, these measures will prove effective to blunt the impact of the Blocking Laws, but they warrant consideration in appropriate circumstances. Regardless, with few signs that U.S.-Sino trade tensions will abate any time soon, U.S. and multinational companies doing business in China, much like Odysseus navigating the straits between Scylla and Charybdis, now face counterpoised perils as they seek both to comply with U.S. sanctions and avoid violating the Chinese Blocking Laws.

DWT will monitor the development and enforcement of these laws and will be ready to assist clients in shaping individualized plans to comply with these new, and potentially challenging, laws.

*On the date of this publication, Edlira Kuka was a law student at Seattle University School of Law and worked as a summer associate at DWT. On November 7, 2023, Edlira was admitted to practice law in the District of Columbia and became an attorney with DWT’s Communications Practice.

FOOTNOTE

1  The Counter-Control List is included only in the AFSL. The PUEL does not include a list but rather establishes the type of measures the PRC will take against a foreign entity engaged in specific activities prohibited by the PUEL. These measures include limits on exports, imports, and entry, along with monetary penalties for violations.