China sanctions: What you need to now

As it seeks to exercise political power on a global scale, China is increasingly using its economic sanctions program to achieve foreign policy and economic objectives. China sanctions activity reflects Beijing’s desire to respond to Western sanctions – in particular to the effects of the US trade war initiated during the Trump presidency, and to targeted measures against Chinese military companies that the US claims are involved in the distribution of surveillance technology. With increased attention from Western sanctions regimes, China’s government has also focused on addressing the effects of secondary sanctions by penalizing firms in China that comply with restrictions imposed by foreign governments. 

Given their increasing significance on the international financial landscape, it is important that firms understand the China sanctions regime and its compliance consequences.

What is the China sanctions regime?

In response to the escalating trade war with the United States, in 2019 China’s Ministry of Commerce (MOFCOM) announced that it would be introducing its own international sanctions program, and publishing designations on its Unreliable Entity List (UEL). According to MOFCOM, entries on the UEL represent foreign individuals and entities that “harm China’s national sovereignty, security, and development interests” or that breach “internationally accepted economic and trade rules.” 

China sanctions are imposed under the Foreign Trade Law (2016) and the National Security Law (2015). The Foreign Trade Law makes provisions for economic restrictions on goods and technology “if it is necessary to restrict or prohibit the import or export under any other circumstance”, while the National Security Law enables China to impose sanctions against “foreign investment, specific items and key technologies and network information technology products and services that affect or may affect national security”.

The UEL was launched in September 2020, although a list of accompanying designations was not immediately published in conjunction.

China sanctions trends

China’s approach to financial regulation has historically been perceived as uncoordinated and ineffective. Since the introduction of the UEL, however, along with formalized legal mechanisms for imposing designations, China’s economic sanctions activity has become more consistent and retaliatory. Notable recent sanctions actions include:

• July 2020: Sanctions announced against the US Congressional-Executive Commission on China along with several US politicians in response to US human rights sanctions against China. 
• August 2020: China sanctions against a number of US individuals, including senators and representatives, in response to US sanctions imposed on Chinese officials deemed to have been undermining the democratic process in Hong Kong. 
• October 2020: Sanctions announced against several US entities and individuals that China deemed to have been involved in selling arms to Taiwan. 
• December 2020: Sanctions against undisclosed US politicians, characterized by a Chinese government spokesperson as “US officials of executive branch, people of Congress and NGOs who act egregiously and bear major responsibilities on Hong Kong-related issues and their immediate family members”. 
• January 2021: Sanctions against 28 UK individuals (and their family members) for perceived interference in China’s affairs. 

Recent sanctions on China: In March 2021, the US, the UK, the EU, and Canada imposed sanctions against numerous Chinese officials and entities under their respective human rights regimes. Following those Western sanctions, China responded by imposing sanctions under its own regime, adding the following designations to the China sanctions list: 

• 10 EU individuals and 4 EU entries 
• 9 UK individuals and 4 UK entities
• 2 US individuals
• 1 Canadian individual and 1 Canadian entity

A MOFCOM statement accompanying the sanctions on China designations stated that the targets had ““severely harmed China’s sovereignty and interests, and maliciously spread lies and disinformation.”

Xinjiang Uyghur Autonomous Region issues

China’s retaliatory approach to sanctions has broadly been interpreted as a response to what it deems to be interference in its domestic affairs in the Xinjiang Uyghur Autonomous Region (XUAR). The Chinese sanctions follow wide-reaching sanctions imposed by the US and other countries against firms with supply chains in the region, and reflect Beijing’s dissatisfaction with the perceived international coordination and consensus against its internal policy.

Hong Kong protests

From mid-2020 to early 2021, the US and other countries imposed sanctions on China following crackdowns by Chinese authorities against pro-democracy protesters in Hong Kong. Those sanctions were accompanied by an amendment to the BIS List, which designated exports to Hong Kong as exports to the People’s Republic of China, and therefore subject to Export Administration Regulations (EAR).

Following the US’ Hong Kong sanctions and BIS designations, China responded with its own sanctions designations against a number of US politicians (listed above).

China’s Anti-Foreign Sanctions Law

In June 2021, China introduced a law designed to block international sanctions targeting its domestic companies, in particular those imposed by the US and the EU. In more detail, China’s Anti-Foreign Sanctions Law, also referred to as the ‘Blocking Rules’, establishes a legal basis for China to block the long-arm jurisdiction of secondary sanctions imposed by foreign countries against a third state.

The Blocking Rules are a significant addition to the China sanctions regime because they have been implemented in direct response to US secondary sanctions that prevent Chinese firms from trading with firms in Iran and North Korea. Under the new law, firms in China that comply with sanctions imposed by foreign countries may be at risk of financial penalties. The Blocking Rules reflect the EU’s Blocking Statute, which was introduced in 2018 and which blocks EU firms from complying with the US’ sanctions on Iran. 

In implementing the Anti-Foreign Sanctions Law, MOFCOM examines the justifiability of the international sanctions before issuing an order to Chinese companies to prohibit compliance. When examining the justifiability of foreign sanctions, MOFCOM considers:

• The sanctions’ potential violation of international law
• The sanctions’ potential impact on Chinese sovereignty
• The sanctions’ impact on the rights of Chinese persons

Chinese firms that suffer financial losses as a result of their compliance with the Blocking Rules may apply for compensation from the Chinese government. Similarly, Chinese citizens may sue firms operating in China that do not comply with the Blocking Rules.

China sanctions conclusion: AML compliance consequences

In strengthening its sanctions programs, enforcing measures against Western individuals and entities, and implementing Blocking Rule penalties, China is effectively attempting to build its own global sanctions regime. 

For firms with business relationships in the West and in China, this means a significantly more complex compliance landscape. The broad scope of the Anti-Foreign Sanctions law means that multinational firms must pay careful attention to China sanctions activity and consider their risk exposure in both Western jurisdictions and China. It is important to bear in mind that the scope of China’s sanctions regime is no longer restricted to political figures: China’s October 2020 sanctions designated Lockheed Martin, Boeing Defense, Space & Security (BDS), and Raytheon on its Unreliable Entities List. 

Given the escalated global compliance risk, international firms must consider China sanctions as part of their AML solution. China sanctions present a range of new compliance challenges: firms should seek to integrate sanctions software that is updated with the latest China data and that is configurable to their risk tolerance. Similarly, a sanctions screening solution should take into account non-Western characters and naming conventions in order to maximise accuracy and reduce false positives. Explore ComplyAdvantage’s sanctions screening tool for a consolidated China sanctions list data solution empowered by machine learning technology to ensure ongoing accuracy and compliance.