China's New Broad Sanctions Law Could Cause Uncertainty, Law Firms Say

China’s recently passed foreign sanctions law gives it broad discretion to penalize companies for obeying U.S. and other countries' restrictions against China, although it remains unclear how China will use the new tools and what specific activities will be targeted, law firms said. Even so, businesses operating in China should closely review the new law, which passed the National People’s Congress in June (see 2106150030) and closely mirrors U.S. regulations. “It creates a menu of countersanctions available to Chinese authorities” that are “taken straight from the U.S. sanctions playbook,” Morrison & Foerster said in a June 30 post.

The law includes a range of countermeasures that China may impose on foreign diplomats, companies or entities for activities that China says violates its laws, international relations or are done to suppress or discriminate against China, Steptoe & Johnson said July 1. But there are still “questions” about how China will choose which activities to target, partly because the law’s language is fairly vague. “This broad definition leaves considerable discretion to the Chinese government to target foreign sanctions that it finds to be contrary to China’s interests,” the firm said.

The broad language means China can target “individuals and entities that comply with” sanctions against China “anywhere in the world,” but it is unclear which foreign sanctions are blocked, Morrison & Foerster said. This is different from the European Union’s blocking statute, which similarly prevents EU countries from complying with certain extraterritorial sanctions but points to specific regimes as examples. “This creates uncertainty for those seeking to comply with the [sanctions law],” the firm said, “while it provides broad discretion to Chinese authorities to decide where to focus on enforcement.”

The firm added that the new law, while broad, doesn’t include U.S.-style secondary sanctions that extend beyond Chinese jurisdiction. This means that while companies may see their assets blocked in China, any transactions that don’t have a Chinese nexus won’t be impacted. But the government has already begun asking Chinese companies whether they are doing business with “certain entities” and if they have been asked to “avoid using materials identified” on CBP’s withhold release orders list related to forced labor concerns (see 2106180017), Sandler, Travis & Rosenberg said July 6.

The scope of the law and the impact of the penalties may not be known until China begins announcing its first countermeasures, Morrison & Foerster said. Much of it will also “largely depend on how actively the Chinese authorities enforce it,” the firm said. Steptoe expects the “immediate impact of the Law on the international business community” to be “limited.” The firms said they expect China to provide “further clarity” on enforcement through future administrative orders.

Along with the sanctions law, companies also have to comply with China’s recently enacted export control law. Businesses may find it increasingly difficult to operate compliance programs for both U.S. and Chinese regimes, Akin Gump said July 2. The firm said companies need to “develop savvy and bespoke compliance solutions to ensure simultaneous compliance” with the “various applicable sanctions laws and sometimes seemingly contradictory blocking rules.”