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China adopts EU-style "blocking statute" - but does it apply to U.S. firms following "primary sanctions?"

Did all media reports so far miss one CRUCIAL thing?

Zichen Wang

Jan 10, 2021

(The good, hard question is in the latter half of this newsletter.)

Beijing is just not gonna let China correspondents or your Pekingnologist rest on Saturdays.

On Saturday, Dec. 19, Beijing published its《外商投资安全审查办法》(CHN) Rules on Foreign Investment Security Review (ENG, Pekingnology). On Saturday, Dec. 26, Beijing published the details of financial regulators’ scrutiny of Jack Ma’s Ant Group (ENG, Pekingnology). And this Saturday, Jan. 9, the Ministry of Commerce dropped the Chinese equivalent to the European Union’s “blocking statute” (ENG, European Commission).

The Ministry of Commerce published a Q&A (CHN) citing Han Liyu, a law professor at the Renmin University of China, alongside the《阻断外国法律与措施不当域外适用办法》(CHN) and a full English translation: Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures.

Bloomberg, Reuters, The New York Times, the Wall Street Journal, and the South China Morning Post have reported the news in the day, as well as the Global Times. But your Pekingnologist, who had spent some time in Brussels, was surprised to find only Bloomberg mentioned in passing Beijing’s stated inspiration. From the Q&A:

欧盟、加拿大、墨西哥、阿根廷等国家和地区先后制定了阻断立法。例如，欧盟（欧共体）于1996年制定了《抵制第三国立法域外适用效果及行动条例》，并于2018年更新修订……
从内容看，《办法》在信息报告、发布禁令、司法救济等方面，借鉴了欧盟等国家和地区的立法经验和制度设计，同时也立足于中国国情，考虑了中国应对外国法律与措施不当域外适用的实际需要。
The EU, Canada, Mexico, Argentina and other countries and regions have enacted blocking legislation. For example, the European Union (then the European Community) formulated the Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom , and updated and it in 2018 ......
In terms of content, the Rules draw on the legislative experience and institutional design of the EU and other countries and regions in terms of information reporting, issuance of injunctions, judicial remedies, etc., while also being based on China's national conditions and taking into account the practical needs of China in dealing with the improper extraterritorial application of foreign laws and measures.

Just as Beijing apparently does now, the EU’s blocking statute is a direct result of the extra-territorial application of laws adopted by the United States, as Brussels says

The European Union does not recognise the extra-territorial application of laws adopted by third countries and considers such effects to be contrary to international law.
In 1996, the United States took such measures concerning Cuba, Iran and Libya. In response, the EU adopted the blocking statute. It protects EU operators engaged in lawful international trade and/or movement of capital, as well as related commercial activities, against the effects of the extra-territorial legislation specified in its Annex. This annex currently consists of U.S. measures concerning Cuba and Iran.
……
Soon after its withdrawal from the Joint Comprehensive Plan of Action (JCPOA), also known as the ‘Iran nuclear deal’, the United States announced that it would be re-imposing sanctions on Iran as from 7 August 2018. In reaction, the EU lost no time in updating the blocking statute in order to include in its annex the re-imposed extra-territorial U.S. sanctions, thereby mitigating the impact of these sanctions on EU operators doing legitimate business in and with Iran.

To be exact, Beijing didn’t mention a thing about the U.S. in promulgating its blocking statute. But let’s not kid ourselves who Beijing is currently counteracting here.

This newsletter will not waste ink on the issues already covered by the media reports, plus there is a full English translation (to the credit of MOFCOM) but sheds light on what our Pekingnologist thinks is interesting.

***

As publicly admitted, Beijing basically modeled its Rules on the EU’s blocking statute.

Both request citizens and companies within their respective jurisdictions to report what they think are unjustified extra-territorial applications:

EU:
Where the economic and/or financial interests of any person referred to in Article 11 are affected, directly or indirectly, by the laws specified in the Annex or by actions based thereon or resulting therefrom, that person shall inform the Commission accordingly within 30 days from the date on which it obtained such information; insofar as the interests of a legal person are affected, this obligation applies to the directors, managers and other persons with management responsibilities
China:
Where a citizen, legal person or other organization of China is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations, he/it shall truthfully report such matters to the competent department of commerce of the State Council within 30 days

And the report can be kept confidential by the authorities, supposedly to protect against U.S. retaliation

EU:
Information which is by nature confidential or which is provided on a confidential basis shall be covered by the obligation of professional secrecy. It shall not be disclosed by the Commission without the express permission of the person providing it.
China:
The matters reported shall be kept confidential by the competent department of commerce of the State Council and its staff members if so requested.

Blocking the designated extra-territorial application of U.S. laws

EU:
Article 5 No person referred to in Article 11 shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the Annex or from actions based thereon or resulting therefrom.
China:
shall issue a prohibition order to the effect that, the relevant foreign legislation and other measures are not accepted, executed, or observed (hereinafter referred to as “prohibition order”).

Both provide punishment for their respective persons and companies that do not abide by the blocking statutes

EU:
Article 9 Each Member State shall determine the sanctions to be imposed in the event of breach of any relevant provisions of this Regulation. Such sanctions must be effective, proportional and dissuasive.
(For example, according to Hughes Hubbard & Reed, “under German law, such a violation constitutes an administrative offence punishable by a fine of up to 500,000 Euros.” )
China:
Where a citizen, legal person or other organization of China fails to truthfully report as required or fails to comply with the prohibition order, the competent department of commerce of the State Council may give a warning, order he/it to rectify within a specified period of time, and may concurrently impose a fine according to the severity of the circumstances.

Both provide remedies, via their respective own courts, for their respective citizens and companies that suffer loss, from the citizens or companies that complied with the designated U.S. laws

EU:
Any person referred to in Article 11, who is engaging in an activity referred to in Article 1 shall be entitled to recover any damages, including legal costs, caused to that person by the application of the laws specified in the Annex or by actions based thereon or resulting therefrom.
Such recovery may be obtained from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.
….through judicial proceedings instituted in the Courts of any Member State where that person, entity, person acting on its behalf or intermediary holds assets.
……the recovery could take the form of seizure and sale of assets held by those persons, entities, persons acting on their behalf or intermediaries within the Community, including shares held in a legal person incorporated within the Community.
China:
Where a person complies with the foreign legislation and other measures within the scope of a prohibition order, and thus infringes upon the legitimate rights and interests of a citizen, legal person or other organization of China, the latter may, in accordance with law, institute legal proceedings in a people’s court, and claim for compensation by the person……
Where a judgment or ruling made in accordance with the foreign legislation within the scope of the prohibition order causes losses to a citizen, legal person or other organization of China, the latter may, in accordance with law, institute legal proceedings in a people’s court, and claim for compensation by the person who benefits from the said judgment or ruling.

Both allow for, at the respective decision of Brussels or Beijing, for exemptions with their respective blocking statutes; in other words, there could be a wavier - compliance with designated extra-territorial application of U.S. laws theoretically can be legal

EU:
Persons may be authorized, in accordance with the procedures provided in Articles 7 and 8, to comply fully or partially to the extent that non-compliance would seriously damage their interests or those of the Community.
China:
A citizen, legal person or other organization of China may apply to the competent department of commerce of the State Council for exemption from compliance with a prohibition order.

The logic in EU and China is largely the same: U.S. laws should not apply here; if somebody complies with them - or court rulings based on those designated U.S. laws - to cause harm to our companies, our companies can sue in our courts; if our courts rule in favor our companies, that somebody would lose money to our companies as payback, and the whole thing is a deterrent to the extra-territorial application of U.S. laws.

Needless to say, that’s between a rock and a hard place.

***

Some points, especially the first one:

1) You Pekingnologist is not totally sure, but thinks this could be too big to miss: are Beijing’s Rules targeting ONLY secondary sanctions?

For starters, to quote from the Atlantic Council, Primary sanctions, such as asset freezes and trade embargoes, prohibit citizens and companies of the sanctioning country from engaging in certain activities with their counterparts from the sanctioned country. Put this in perspective, this could mean U.S. laws banning an American company from selling stuff to a Chinese one.

Secondary sanctions put pressure on third parties to stop their activities with the sanctioned country by threatening to cut-off the third party’s access to the sanctioning country. Put this in perspective this could mean U.S. laws banning a non-American (European, Japanese, Korean, etc.) company from selling stuff to a Chinese one.

If Beijing’s Rules target ONLY secondary sanctions, and NOT cover primary sanctions, then, supposedly, Huawei can’t use the Rules against Qualcomm, which is American but can use the Rules against Sony or TSMC, which are NOT American. (Just an example for the sake of an example, not that Huawei would.)

Just look at the title - 《阻断外国法律与措施不当域外适用办法》Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures. If an American company is following U.S. law, that’s usually just NOT extra-territorial application.

Beijing’s Rules consistently used the word “a third” - normally, by mentioning a third, it would imply there are two other parties - companies from the sanctioning country and companies from the sanctioned country - already.

Article 2 These Rules apply to situations where the extra-territorial application of foreign legislation and other measures, in violation of international law and the basic principles of international relations, unjustifiably prohibits or restricts the citizens, legal persons or other organizations of China from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations.
Article 5 Where a citizen, legal person or other organization of China is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations, he/it shall truthfully report such matters to the competent department of commerce of the State Council within 30 days.

What’s more, the law professor Han Liyu was quoted by the Ministry of Commerce Q&A as explicitly saying the Rules ONLY target 次级制裁 secondary sanctions:

办法第二条明确界定了适用范围，即违反国际法和国际关系基本准则，不当禁止或限制中国企业与第三国企业正常经贸活动的外国法律与措施的域外适用情形。这种情形，我们通常称之为“次级制裁”。
Article 2 of the Rules clearly defines the scope of application, that is, the extraterritorial application of foreign laws and measures that unjustifiably prohibit or restrict the normal economic and trade activities of Chinese enterprises and third-country enterprises in violation of international law and basic norms of international relations. This situation, we usually call "secondary sanctions."

So if this argument holds, does it mean that U.S. companies banned from doing business with China because of U.S. laws - primary sanctions - just don’t have to worry about this? In other words, only European, Japanese, Korean, and other businesses are potentially affected?

Your Pekingnologist is UNSURE first because this would be too surprising especially given that none of the reports from all the leading international media mentioned this. The NYT’s report is titled China’s New Rules Could Hit U.S. Firms and Send a Message to Biden and the WSJ’s report is titled China’s New Rules Amp Up Pressure on U.S. Businesses.

Nick Turner, a Hong Kong-based lawyer with Steptoe & Johnson who was quoted in the Bloomberg report, gave these comments to your Pekingnologist on Sunday:

The EU has had its blocking statute since 1996. It is not surprising to me that China has adopted a similar mechanism. The fact that it was released in close proximity in time to several China-focused US sanctions doesn’t mean it was intended to respond to them.
The media focus over the past couple of days has obviously been on the United States and recent US sanctions targeting Chinese companies. Despite the headlines, I think we need to wait for further clarification from MOFCOM and examples of prohibition orders before we can assume anything.
The MOFCOM order doesn’t mention the United States or any other jurisdiction. We can only speculate at this time about which foreign sanctions measures might be targeted under the order.
In my opinion, so-called “primary” sanctions are neither “unjustified” nor “extra-territorial.” There’s a big question about whether the MOFCOM order would even apply to them. For example, a US company that follows US law is probably safe. On the other hand, the order may well apply to so-called “secondary” sanctions, like those targeting Iran. This would make the MOFCOM order similar to the EU blocking statute.

2) Whereas the EU maintains an Annex clearly specifying which U.S. laws are blocked, such as the Cuban Liberty and Democratic Solidarity Act of 1996 and Iran Sanctions Act of 1996, China does not.

Beijing’s approach is relying upon Chinese citizens and companies to report unjustified extra-territorial application of foreign legislation and other measures, after which Beijing ponders it, and if Beijing so decides, shall issue a prohibition order against the foreign laws.

3) The media reports so far largely didn’t mention this, but your Pekingnologist wonders if, citizens and businesses in China now have not only a right to report but an obligation, because the Ministry of Commerce uses the word 应当 which though it translates as SHALL, carries a strong tone in the original Chinese toward MUST, instead of MAY.

(Reuters in its report use MAY, instead of SHALL: According to the notice, a Chinese person or organisation that is restricted by foreign legislation from “engaging in normal economic, trade and related activity with a third State or its citizens,” MAY report it to the commerce department within 30 days. )

Further, the Rules as well as the Q&A published by the ministry quoting Han, the law professor, both threaten possible legal punishments for those who do not report, suggesting it’s more likely an obligation.

第五条中国公民、法人或者其他组织遇到外国法律与措施禁止或者限制其与第三国（地区）及其公民、法人或者其他组织正常的经贸及相关活动情形的，应当在30日内向国务院商务主管部门如实报告有关情况。
Article 5……he/it shall truthfully report such matters to the competent department of commerce of the State Council within 30 days
……
第十三条中国公民、法人或者其他组织未按照规定如实报告有关情况或者不遵守禁令的，国务院商务主管部门可以给予警告，责令限期改正，并可以根据情节轻重处以罚款。
Article 13 Where a citizen, legal person or other organization of China fails to truthfully report as required or fails to comply with the prohibition order, the competent department of commerce of the State Council may give a warning, order he/it to rectify within a specified period of time, and may concurrently impose a fine according to the severity of the circumstances.

韩立余称，需要指出的是，企业合法权益受到保护的同时，也要承担一定的义务，比如要及时报告相关情况、遵守禁令等，否则将会受到相应处罚。
Han Liyu said, it should be noted that at the same time as the legitimate rights and interests of enterprises are protected, they also have to assume certain obligations, such as the timely reporting of relevant information, compliance with the ban, etc., or will be punished accordingly.

So if it indeed becomes an obligation in enforcement, does it mean, at least on paper, that affected companies don’t have a choice of staying low?

For what is worth, the European blocking statute also used shall, but its exact meaning and enforcement are unknown to your Pekingnologist.

Where the economic and/or financial interests of any person referred to in Article 11 are affected, directly or indirectly, by the laws specified in the Annex or by actions based thereon or resulting therefrom, that person shall inform the Commission accordingly within 30 days

4) The European blocking statute is applicable to any legal person incorporated within the Community. The Chinese Rules cover 中国公民、法人或者其他组织 citizens, legal persons, and other organizations of China.

But the 法人 legal persons of China may not just be Chinese companies per se. Foreign-China joint ventures and wholly-owned companies registered in China are also 法人 legal persons of China … right?