On May 12, 2025, the United States and China announced that each country would reduce tariff rates on the goods of the other country by 115%, marking a significant breakthrough in the rapidly escalated trade war.

On May 12, 2025, the White House released a Joint Statement with the People’s Republic of China, accompanied by a Fact Sheet, announcing a significant step back from the high tariff rates each country had imposed on the goods of the other since the beginning of April. On the same day, President Trump issued an Executive Order titled “Modifying Reciprocal Tariff Rates to Reflect Discussions with the People’s Republic of China” (“May 12 Order”), directing relevant U.S. agencies to implement reduced tariffs on goods from China. This alert provides an overview of the impactful commitments made in the Joint Statement by the United States and China, where both governments recognized “the importance of the critical bilateral economic and trade relationship between both countries and the global economy” and committed to take certain actions by May 14, 2025, to substantially reduce the previously imposed tariffs.

The Joint Statement marks a significant breakthrough, signaling that both the United States and China have pulled back from the brink of a more serious trade war and a potential collapse in bilateral economic relations. As noted by Treasury Secretary Scott Bessent, the United States does “not want a generalized decoupling from China.” While the Joint Statement involves mutual concessions, it remains expressly a temporary measure rather than a comprehensive or lasting resolution. While much remains to be negotiated, the Joint Statement represents a hopeful step forward.

I. U.S. Reduces Tariffs on Chinese Goods Imposed under IEEPA to 30% for the
Initial Period of 90 Days

The May 12 Fact Sheet notes that the United States and China will each lower tariffs by 115% while retaining an additional 10% tariff. Consistent with this statement, effective May 14, 2025, Chinese goods, including those originating in Hong Kong and Macau, will be subject to a total of 30% tariffs imposed under the International Emergency Economic Powers Act (IEEPA) for an “initial period of 90 days.” These emergency tariffs will be applied in addition to any other applicable tariffs, including tariffs imposed under Section 232, Section 301, or “most favored nation” duties. Specific breakdowns are provided below.

10% So-Called “Reciprocal” Tariffs

Pursuant to Section 2 of the May 12 Order, effective with respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 14, 2025, all articles imported into the United States from China, including Hong Kong and Macau, will be subject to an additional ad valorem tariff of 10% under the so-called “reciprocal” tariffs imposed by Executive Order 14257 of April 2, 2025. The prior April 2 executive order had imposed broad-reaching so-called “reciprocal” tariffs on all U.S. trading partners except for Mexico and Canada. The original country-specific rate for goods from China announced in that order was 34%. Under the May 12 Order, 24 percentage points are “suspended” for 90 days and replaced by the 10% duty. The May 12 Order removes the retaliatory tariff rates announced in subsequent executive orders of early April, notably the increased tariffs imposed by Executive Order 14259 (increasing the rate to 84%) and Executive Order 14266 (increasing the rate to 125%).

As a consequence of the May 12 Order, if a new deal is not reached during the initial period of 90 days, it appears that the United States may raise the “reciprocal” duty rate on Chinese goods to the originally announced 34%.

20% IEEPA-Fentanyl Tariffs and Other Tariffs that Continue to Apply

The May 12 Fact Sheet clarifies that the United States will retain all duties imposed on China prior to April 2, 2025, including: (i) Most Favored Nation tariffs; (ii) tariffs imposed under Section 301; (iii) industry-sector tariffs imposed under Section 232; and (iv) tariffs imposed pursuant to IEEPA related to the fentanyl-related national emergency announced and expanded in Executive Order 14195.

By way of background, on February 1, 2025, President Trump issued an executive orderimposing an additional 10% ad valorem rate of duty to all articles that are products of China or of Hong Kong, citing a national emergency with respect to illegal drugs entering the United States and China’s alleged failure to arrest, seize or otherwise intercept chemical precursor suppliers and money launderers connected to the illegal drug trade. President Trump subsequently increased such duties on China to 20%, effective March 4, 2025, citing China’s continued failure to adequately respond to the emergency. Thus, the total IEEPA-related tariffs imposed on goods from China is now 30%.

In addition, the Section 301 tariffs, imposed during the first Trump Administration in response to certain technology transfer practices in China, generally range from 7.5% to 25%, with certain products subject to higher duties up to 100%. Consequently, the effective average rate of duty for goods from China is approximately 40%-55%.

De Minimis Tariffs Adjustments

Section 4 of the May 12 Order decreases the tariff rate applicable to low-value imports from China (i.e., goods previously eligible for duty-free treatment under the de minimis exclusion) from 120% to 54%.

By way of background, the de minimis statutory exemption allows many shipments valued at $800 or less to enter the United States duty-free. Section 2(c)(i) of Executive Order 14256 of April 2, 2025 (Further Amendment to Duties Addressing the Synthetic Opioid Supply Chain in the People’s Republic of China as Applied to Low-Value Imports) eliminated the de minimis exception for China imports, effective May 2, 2025. Subsequently, Executive Order 14259 and Executive Order 14266 increased the duty rate on such goods.

The May 12 Order decreases the ad valorem rate of duty for low-value shipments from China and Hong Kong from 120% to 54% (this is still higher than the originally proposed low-value shipment rate of 30%). However, the May 12 Order retains the alternative “specific duty” option for low-value shipments delivered to the United States from China or Hong Kong via the international postal network at $100 per postal item, though this rate is no longer subject to the automatic increase originally scheduled to go into effect on June 1, 2025.

While the de minimis exclusion has been removed for goods from China and Hong Kong, it is still presently in place for imports that originate in other jurisdictions. However, President Trump has previously directed the Secretary of Commerce to develop mechanisms to collect IEEPA-based duties on low-value shipments from other jurisdictions.

II. Chinese Actions and Consultation Mechanism

China Lowers Tariffs on U.S. Goods to 10%

Pursuant to the Joint Statement, China issued an Announcement of the Customs Tariff Commission of the State Council No. 7 of 2025 on May 13, 2025, local time, that suspends the prior 34% tariff on goods from the United States originally announced on April 4, 2025, for a matching 90 days, while retaining a parallel 10% tariff during the period of the pause.

China to Remove Non-Tariff Barriers

In the Joint Statement and accompanying Fact Sheet, China committed to “adopt all necessary administrative measures to suspend or remove the non-tariff countermeasures taken against the United States since April 2, 2025.”

By way of background, China announced a range of non-tariff retaliatory measures on April 4, 2025, including the following:

China’s Ministry of Commerce added 11 U.S. companies to its list of so-called “unreliable entities,” which bars them from engaging in all import and export activities in China and making new investments in China.
Beijing added 16 U.S. entities to its export control list, which prohibits exports of dual-use items to the listed firms. Nearly all of the firms so targeted operate in the defense and aerospace industries.
The Ministry of Commerce announced the launch of an anti-dumping probe into imports of certain medical computed tomography tubes from the United States and India.
Beijing launched an anti-monopoly investigation into the PRC subsidiary of a major U.S. chemical company.
Beijing announced export controls on seven types of rare earth minerals to the United States, which are vital to end uses ranging from electric cars to defense. Notably, the United States imports its rare earth materials predominantly from China, which produces approximately 90% of the world’s supply.

Parties to Establish a Consultation Mechanism

The Joint Statement also promises that the U.S. and China “will establish a mechanism to continue discussions about economic and trade relations,” and that such discussions may be conducted alternately in China and the United States, or a third country upon agreement of the parties.

Conclusion

These developments involving the critical bilateral trading relationship between the United States and China, a relationship valued at an estimated $582 billion worth of annual goods trade, underscores the ongoing fluidity in global trade policy. We will continue to closely monitor developments related to tariffs and the progress of this and other anticipated trade deals. Gibson Dunn lawyers are prepared to help clients navigate this evolving landscape.

The following Gibson Dunn lawyers prepared this update: Hui Fang, Adam M. Smith, Donald Harrison, and Samantha Sewall.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade Advisory & Enforcement practice group:

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This update provides an overview of China’s major antitrust developments during 2024 and expectations for 2025.

Happy New Year of the Snake!

In 2024, we saw continued efforts by the Chinese authorities to build on the existing antitrust framework by supplementing new regulations and guidelines. These refreshed rules provide valuable insights on the interpretation and application of the Anti-Monopoly Law (AML) in China. On the merger control side, there has been a reduction in the overall volume of merger review cases given the increased notification thresholds, while technology and semiconductor mergers remain heavily scrutinized. On non-merger enforcement, authorities are consistently pursuing industries that are close to people’s livelihood, with a focus on the public utilities sector, energy suppliers and the automobile industry. Lastly, the Supreme People’s Court published a new judicial interpretation guide on monopoly civil dispute cases, which sheds important light on the procedural and substantive rules governing antitrust litigation in China.

The tech sector is likely to be a particular area of focus for SAMR, in particular given the trade tensions between the PRC and the United States.

I. Legislative and Regulatory Developments

In 2024, several regulations were revised or introduced to further develop China’s antitrust framework. Some selected highlights include:

Regulations on Filing Thresholds for Concentration of Undertakings (the “Merger Notification Thresholds Regulations”)
Guidelines on Horizontal Merger Review (the “Horizontal Merger Review Guidelines”)
Revised Notification Form for Anti-Monopoly Review of Simple Cases of Concentration Between Undertakings (the “Simplified Form”) and Publication Form for Simple Cases of Concentration Between Undertakings (the “Public Notice Form”)
Guide to the Anti-Monopoly Compliance of Undertakings (the “Undertakings’ Compliance Guide”)
Interim Provisions on Regulation of Unfair Competition on the Internet (the “Internet Regulation Provisions”)
Antitrust Guidelines on Standard-Essential Patents (SEP) (the “SEP Guidelines”)

A summary of these selected legislations is set out below.

Merger Notification Thresholds Regulations. These State Council-issued regulations came into effect in early January 2024. The filing thresholds are increased to reflect economic growth, such that undertakings must obtain merger clearance from SAMR if:

The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.66 billion)(an increase from RMB 10 billion (~USD 1.38 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 110 million) (an increase from RMB 400 million (~USD 55.2 million)); or

The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 552 million) (an increase from RMB 2 billion (~USD 276 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).

Horizontal Merger Review Guidelines. These SAMR guidelines, which came into effect in December 2024, provide insights on the general approach of SAMR in the evaluation of horizontal mergers based on market shares:

Combined Market Shares	Evaluation
More than 50%	Presumption of anticompetitive effects
25% to 50%	Likely to have anticompetitive effects
15% – 25%	Unlikely to have anticompetitive effects
Below 15%	Presumption no anticompetitive effects

The guidelines also offer an overview of the relevant tools used by SAMR in its merger review. These include, for example, the Herfindahl–Hirschman Index (HHI) supplemented by Concentration Ratios (CRn) for assessing market concentration; and quantitative analysis methods such as Upward Pricing Pressure (UPP), Gross UPP Index (GUPPI), and Merger Simulation for analyzing unilateral effects. Where anticompetitive effects are identified, SAMR may also look at whether any counteracting factors exist, such as constraints from potential competition, whether market entry is possible, timely, and sufficient, and buyer power. The “failing firm theory” is also provided for the first time, where SAMR will consider whether: (1) the business operator being acquired is facing operational difficulties and will exit the market in the short term if not merged; (2) there is no alternative solution (other than the proposed merger) that would cause less damage to competition; and (3) compared to the market exit, the potential anticompetitive effects of the merger are weaker.

Further, the guidelines also explain how the authorities can obtain evidence materials from various sources apart from the concentration parties, including upstream suppliers, downstream/end customers, government departments, industry associations, and competitors. In particular, the guidelines provide that the opinions of downstream customers on concentration are more important than the views of upstream suppliers and the merger parties.

Streamlined Simplified Filing Forms. SAMR revised the Simplified Form and the Public Notice Form in September 2024. These revisions simplified the procedure for transactions that are unlikely to have significant competitive effect in China by requiring parties to fill in less information and fewer details compared to before. For example, parties are no longer required to prepare and submit a non-confidential version of the Simplified Form. Further, the requirements for a detailed assessment of the impacts of the proposed concentration are reduced. Similarly, the number of mandatory information items required in the Simplified Form has been reduced.

Undertakings’ Compliance Guide. This guide, which took effect in April 2024, applies to businesses operating within China and those outside China if their activities impact the domestic market. It outlines the structure for effective internal compliance management, including the roles of various departments and the responsibilities of the compliance governance department. Businesses are encouraged to establish professional compliance teams, identify and assess compliance risks, and regularly update these assessments. Additionally, an undertaking may apply for compliance incentives before and during the formal investigation and enforcement process. Such incentives may include leniency or a reduction in the monetary penalty imposed, and even full exemptions from administrative penalties. SAMR will decide on whether to grant such incentives based on factors such as the completeness, veracity, and effectiveness of the antitrust compliance mechanism of the business.

Internet Regulation Provisions. These SAMR-issued provisions, which took effect in September 2024, are the first comprehensive regulations specifically aimed at preventing and deterring unfair competition online, protecting the rights of operators and consumers, and promoting the sustainable development of the digital economy. The provisions prohibit acts such as causing confusion as to the source of products or services, false advertising, the use of misleading or false information that may damage the reputation of competitors, and using technical means (such as internet traffic hijacking) to disrupt competitors’ online business operations. Platform operators are tasked with managing competitive behaviors, taking necessary actions against unfair practices, and maintaining records for at least three years.

SEP Guidelines. These SAMR-issued guidelines, which took effect in November 2024, build on existing Chinese antitrust law and provisions, aiming to balance the interests of SEP holders and implementers by ensuring both intellectual property protection and fair market competition. There is new guidance on the promotion of “ex-ante” and “in-process” supervision, requiring proactive reporting of possible antitrust issues to the authorities by parties such as SEP holders and operators. Further, the new guidelines also require antitrust authorities to strengthen such pre-emptive and interim supervision.

Separately, the new guidance also states that in determining whether there is an abuse of SEPs to exclude or restrict competition, the authorities should give full consideration to the disclosure of information, licensing commitments, and licensing negotiations (in good faith) concerning the SEPs. For example, SEP holders are required to declare that they agree to license other operators on a “fair, reasonable, and non-discriminatory” (FRAND) basis. Nonetheless, the failure to engage in such “good conduct” in itself does not necessarily result in a violation of antitrust laws.

The SEP Guidelines also cover SEP patent pools, prohibiting the use of such patent pools to reach monopoly agreements. In addition, guidance is provided on the determination of SEP-related abuse of dominant market position, where the antitrust authorities will consider whether SEP holders are charging unfairly high royalties, imposing unreasonable terms, or forcing SEP implementers to accept package licensing. There is also guidance restricting SEP holders from abusing the remedies for infringement of patent rights.

Further Legislative Efforts. In addition to the various finalized regulations and guidance discussed above, SAMR introduced draft regulations in 2024, including the Draft Measures for the Implementation of the Regulation on Fair Competition Reviews, and the Draft Interim Measures for the Administration of Compliance Data Reporting for Online Transactions. SAMR is also expected to formulate penalty scales for monopolistic conduct and abuse of dominance to ensure consistent enforcement. It appears that sustained legislative efforts can be expected in 2025.

II. Merger Control

Merger Review

In 2024, SAMR closed 643 merger review cases in total (as compared to 797 cases in 2023). Of these, 623 (~97%) received unconditional approval, 1 received conditional clearance, and 19 were withdrawn by the filing parties after SAMR’s acceptance of their case.

Overall, there were fewer merger cases for review, likely because of the increased merger notification thresholds (see above). Of the cases notified, SAMR completed most reviews within 30 days (around 91% of cases were reviewed under the simplified procedure). That said, SAMR took 512 days to complete its review in the sole conditional clearance case, which is much longer than the average review time of 309 days in 2023. The lengthy review was attributable to SAMR’s exercising of its relatively new power to extend the review period by “stopping the clock” and reflects SAMR’s strategy to focus its resources on cases that raise substantive competitive issues.

This conditional clearance case was the JX Nippon/Tatsuta merger, which involved two Japanese entities in the semiconductor space and was conditionally cleared in June 2024. This case is an example of SAMR’s authority to impose remedies on a deal that fell below the merger notification threshold. Specifically, the deal was first notified in January 2023 but fell below the notification thresholds when the thresholds were raised in January 2024. The parties requested to withdraw the filing based on the new turnover thresholds, but SAMR declined the request and continued with its review, eventually issuing a conditional clearance with a series of behavioral remedies imposed for a period of 8 years. The remedies include:

When selling JX Nippon and Tatsuta products to Chinese customers, neither JX Nippon nor its distributors shall: (i) bundle products or impose unreasonable conditions; (ii) restrict separate purchases or discriminate against customers who do so; or (iii) obstruct partners from choosing third-party products;
JX Nippon shall supply blackened rolled copper foil and isotropic conductive adhesive films on FRAND terms; and
JX Nippon shall maintain compatibility levels with third-party products unless required by customers.

Another case worth highlighting is the Synopsys/Ansys acquisition between two US software companies, which is the largest technology sector deal in 2024. Notably, SAMR exercised its discretionary power to call in this merger in May 2024, even though the acquisition was below the revised notification thresholds. This call-in was suspected to be due to concerns from Chinese domestic competitors and downstream customers over the horizontal effects of electronic-design automation. Furthermore, the merger parties are broadly active in simulation software and electronic design automation tools and have significant key strategic presence in China, including in semiconductors, automotive, and aerospace. These are all sectors that SAMR has been historically focusing its review on and it is expected that SAMR will continue to keep a close eye on these industries.

Gun-Jumping Enforcement

Following the Chinese Anti-Monopoly Law (AML) amendments in 2022 (see our 2022 Review) and SAMR’s release of the Merger Control Compliance Guidelines in 2023 (see our 2023 Review), SAMR increased the gun-jumping fines and clarified the sanctions for gun-jumping. These sanctions can be up to 10% of the undertaking’s revenue in the prior year for cases that have the effect of restricting competition (which can be further multiplied by two to five times for particularly serious cases) or up to RMB 5 million (~ USD 0.69 million) for cases that do not restrict competition.

In 2024, we saw the first two gun-jumping decisions published by SAMR since the 2022 AML amendments. The first decision, published on 7 June 2024, was made against Shanghai Highly (Group) Co., Ltd and Qingdao Haier Air Conditioner Gen. Corp., Ltd, where SAMR fined each company RMB 1.5 million (~USD 0.21 million) for obtaining a joint venture business license before obtaining merger approval from SAMR. While SAMR did approve the joint venture in the end, obtaining the business license typically indicates the implementation of the joint venture, and therefore the parties were found to have improperly “jumped the gun”.

The second gun-jumping decision, published on 5 August 2024, involved Maoming Urban and Rural Construction Investment and Development Group, where it completed the share transfer registration of the acquisition of a 51% stake in Guangdong Zhongyuan Investment during the public notice period (and therefore before SAMR clearance). While SAMR ultimately found no exclusion or restriction of competition, it still imposed a fine of RMB 1.75 million (~USD 0.24 million) for gun-jumping.

The increased fines and clear sanctions indicate that SAMR is committed to enforcing compliance and deterring companies from bypassing regulatory approval processes. The enforcement actions will likely encourage compliance awareness and more cautious behavior from companies involved in mergers and acquisitions.

III. Non-Merger Enforcement

Like previous years, the enforcement decisions published by SAMR in 2024 indicate a continued focus on the usual sectors, including public utilities, energy suppliers, and construction material manufacturers. While pharmaceutical corporations and industry associations have not been a focus this year, unlike in 2023, automobile companies are back in the spotlight. In 2024, automobile companies had the highest number of enforcement actions brought against them. In total, SAMR and local AMRs brought enforcement actions against over 64 automobile companies and related associations.

A key development in 2024 is the completion of Alibaba’s three-year compliance rectification program under SAMR’s supervision, which began in 2021 when SAMR fined Alibaba RMB 18.2 billion (~USD 2.51 billion) for Alibaba’s restrictive dealing practices. Specifically, Alibaba was found to have restricted platform merchants to exclusively use the Alibaba platform by prohibiting merchants from opening stores or participating in promotional activities on other competitive platforms. On 30 August 2024, SAMR announced that Alibaba has completion the rectification program and recognized its compliance efforts.

Similarly, Meituan also received a hefty fine of RMB 3.4 billion (~ USD 469 million) from SAMR back in 2021 for abusing its market position by implementing the “choose one from two” obligation, forcing merchants to form partnerships and distribute products exclusively with its platform. In November 2024, Meituan announced that as part of its rectification efforts, it would invest 1 billion RMB to share profits with merchants on the platform. The first batch of funds is expected to cover 15,000 shops to support the innovative development of catering merchants. Interestingly, while Meituan’s rectification program should have ended in October 2024 according to the initial timeline set out in SAMR’s decision, we have yet to see any official announcement from SAMR on the completion of Meituan’s rectification program.

On 13 August 2024, the first data monopoly enforcement case by an AMR took place, where the Shanghai Municipal Administration for Market Regulation fined Ningbo Sumscope Information Technology Co Ltd (Sumscope) for monopolizing financial data products. Sumscope, a financial information technology company, entered into an exclusive agreement with a bond broker, granting exclusive rights to use and resell the broker’s real-time bond brokerage transaction data. Sumscope then processed and packaged this data into a product, which it sold to downstream customers. The Shanghai AMR found that Sumscope’s refusal to provide such data to other service providers constituted a refusal to deal. Additionally, Sumscope imposed unreasonable trading conditions by setting a minimum transaction amount of RMB 700,000 (~ USD 96,600) for its information services. The AMR determined that Sumscope abused its market dominance and fined the company RMB 4.53 million (~ USD 0.63 million). This enforcement highlights the authority’s focus on ensuring the efficient circulation of financial data.

IV. Antitrust Litigation

In the antitrust litigation space, the Supreme People’s Court (the “SPC”) issued the Judicial Interpretation Concerning the Application of Law in the Trial of Monopoly Civil Dispute Cases (the “Civil Judicial Interpretation”), which took effect on 1 July 2024, replacing the previous judicial interpretation from 2012. The Civil Judicial Interpretation introduces several key updates and clarifications to the legal framework governing antitrust litigation in China. Some highlights include:

In terms of procedural rules for monopoly-related civil disputes, the Civil Judicial Interpretation has alleviated the burden of proof on plaintiffs by confirming the high probative value of antitrust administrative decisions in follow-on litigation, clarifying situations where market definition does not need to be proven, and reducing the difficulty of proving market dominance. The judicial interpretation also implements the requirement under the AML to improve the coordination mechanism between judicial and administrative enforcement, and specifies that litigation can be “suspended” when parallel administrative enforcement is ongoing, and that the limitation period will be interrupted by administrative complaints, among other mechanisms.
Regarding substantive rules, the Civil Judicial Interpretation provides more comprehensive and detailed guidance for disputes involving monopoly agreements and abuse of market dominance. For example, it clarifies the four elements of abuse of market dominance, establishes a more comprehensive framework for assessing unfair high/low prices, and adds new scenarios for identifying unreasonable terms.
Additionally, the judicial interpretation specifically addresses issues in the digital economy. It offers responses to problems such as algorithmic collusion, most-favored-nation (MFN) clauses, and platforms openness issues.

The Civil Judicial Interpretation crystallizes the SPC’s judicial practices and is a welcomed addition to the existing guidelines, as it will provide greater legal certainty for market participants.

The SPC also published a total of nine representative anti-monopoly cases for the year of 2024. These cases provide valuable guidance on the interpretation and application of AML in practice. There are two cases particularly worth highlighting:

Patent on Desloratadine Citrate Disodium API Case: The SPC ruled that although the defendant held a dominant market position, this position was significantly weakened due to strong indirect competition constraints from the downstream market. Furthermore, the defendant’s practice of exclusive dealing did not exceed the scope of legitimate exercise of patent rights and therefore did not constitute an abuse of market dominance. Additionally, the SPC provided helpful guidance on identifying unfairly high prices, stating that a significant price increase relative to cost increase alone is insufficient to prove unfair pricing. Instead, factors such as the internal rate of return after the price increase and the alignment between price and economic value must be comprehensively considered.
Industrial Lubricants Hub-and-Spoke Agreement Case: The SPC found that Shell (China) Limited coordinated and organized its authorized distributors to engage in practices such as bid-rigging and submitting high bids, effectively acting as an organizer of a horizontal monopoly agreement among the distributors. In accordance with China’s Tort Liability Law, the SPC held that Shell (China) and the relevant distributors should be jointly liable for their actions as co-infringers, among other liabilities. This case is the first hub-and-spoke agreement monopoly case adjudicated by Chinese courts. Since the alleged monopolistic behavior occurred before 2017, which predates the enforcement date of the 2022 AML, the 2008 AML applies to this case. Although the 2008 AML did not explicitly regulate hub-and-spoke agreements, the SPC was still able to address civil tort liability under the 2008 AML and the Tort Liability Law. The 2022 AML formally incorporated hub-and-spoke agreements into its regulatory scope under Article 19. This case not only highlights the application of the 2008 AML but also provides valuable guidance for interpreting and enforcing Article 19 of the 2022 AML in future cases.

In addition, the case of Li v. Didi also offers insightful perspectives on legal issues and practical interpretations of the AML. This case involves a claim filed by an individual consumer against Didi, alleging that the company engaged in differential treatment towards plaintiff through big data and algorithms, constituting an abuse of market dominance. In December 2023, the Beijing Intellectual Property Court dismissed plaintiff’s claims in the first instance judgement. In November 2024, the SPC upheld the decision made in the first instance and rejected plaintiff’s appeal. The SPC ruled that ride-hailing services do not constitute a separate relevant product market. Instead, the relevant market in this case should at least include the broader transportation service market, which encompasses both ride-hailing services and traditional taxi services that can be booked online. The court found that Didi does not hold a dominant position in this relevant market. Furthermore, the differential treatment applied to different user accounts was deemed to have legitimate justification and did not constitute an abuse of market dominance.

Several cases highlighted in our 2023 Review remain ongoing, including the Lizhen v. Alibaba case, for which the SPC held an open trial in January 2025, and the JD.com v. Alibaba case, where Alibaba filed an appeal with the SPC. We will continue to monitor the developments in these cases and the SPC’s rulings in 2025.

V. Conclusion

Throughout 2024, the Chinese authorities have continued their efforts to provide comprehensive guidance on the compliance, enforcement and interpretation aspects of the AML. Meanwhile, we anticipate increasing overlap between administrative enforcement and judicial activities, and the coordination between the two will be a key focus in the coming year. Businesses are advised to closely monitor regulatory and enforcement developments, thoroughly assess anti-monopoly compliance risks in their business activities, and proactively formulate compliance strategies to address potential challenges.

The following Gibson Dunn lawyers prepared this update: Sébastien Evrard and Katie Cheung.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following authors in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)

Katie Cheung (+852 2214 3793, kcheung@gibsondunn.com)

In 2022, China has finally amended its Anti-Monopoly Law. This has been more than two years in the making: the State Administration for Market Regulation (“SAMR”) first proposed amendments in early 2020 and a formal draft amendment was submitted to the Standing Committee of the National People’s Congress for a first reading in October 2021. In an effort to support and clarify the amended law, the Government released draft amendments to a number of antitrust regulations and rules for public consultation in June 2022. The Government also published its draft amendments to the Anti-Unfair Competition Law for comment consultation in November 2022.

This client alert provides an overview of China’s major antitrust developments in 2022.

1. Legislative / Regulatory Developments

Amendments to the Anti-Monopoly Law. In 2022, China finally amended the Anti-Monopoly Law (“Amended AML”) for the first time, 14 years after its introduction. The Amended AML came into force on August 1, 2022. It emphasizes the fundamental role of competition in China’s market economy and introduces substantial changes to the country’s merger review process and rules on anticompetitive agreements. It also substantially increases fines for violating the Amended AML and introduced, among other new penalties, liabilities on individuals. Here are some of the key substantive provisions included in the Amended AML:

Review of non-threshold transactions: The Amended AML enables SAMR to require parties to a concentration (where the concentration does not otherwise trigger mandatory reporting obligations) to notify the transaction where “the concentration of undertakings has or may have the effect of eliminating or restricting competition.”
Introduction of the stop-the-clock system: The Amended AML grants SAMR the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved.
Abandoning per se treatment for resale price maintenance (“RPM”): The Amended AML introduces a provision which states that a monopoly agreement between parties fixing the price or setting a minimum price for resale of goods to a third party “shall not be prohibited if the undertaking can prove that it does not have the effect of eliminating or restricting competition.” This means where a plaintiff alleges breach of the Amended AML by way of an RPM agreement, it is open to a defendant to prove that the RPM agreement does not eliminate or restrict competition and therefore is not unlawful.
Safe harbors for vertical monopoly agreements: The Amended AML introduces a “safe harbor” for vertical monopoly agreements, which presumably include RPM agreements, in circumstances where “undertakings can prove that their market share in the relevant market is lower than the standards set by the anti-monopoly law enforcement agency of the State Council and meet other conditions set by the anti-monopoly law enforcement agency of the State Council shall not be prohibited.” This provision authorizes SAMR to determine the threshold for the safe harbor, which we can expect in due course.
Cartel facilitators: The Amended AML provides that undertakings “may not organize other undertakings to reach a monopoly agreement or provide substantial assistance for other undertakings to reach a monopoly agreement.” This provision fills an arguable gap in the AML, as cartel facilitators e.g., third parties that aid the conclusion of anticompetitive agreements or cartels, may now be found in breach of the Amended AML.
Increased and new penalties: The Amended AML substantially increases fines that could be imposed and creates new fines. These include:
- Penalties on cartel facilitators: SAMR may impose a fine up to RMB 1 million (~USD 147,000) on cartel facilitators.
- Increased penalties for merger-related conduct: Where an undertaking implements a concentration in violation of the Amended AML, SAMR may impose a fine of less than 10% of the undertaking’s sales from the preceding year. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~USD 727,000).
- Superfine: Where the violation of the Amended AML is “extremely severe,” its impact “extremely bad” and the consequence “especially serious,” SAMR can multiply the amount of fine by a factor between two and five.
- Penalties for failure to cooperate with investigations: Where an undertaking fails to cooperate in anti-monopoly investigations, SAMR may impose a fine of less than 1% of the undertaking’s sales from the preceding year or, where there are no sales or the data is difficult to be assessed, a maximum fine of RMB 5 million (~USD 727, 000) on enterprises and RMB 500,000 (~USD 72,700) on individuals involved.
- Penalties on individuals: The Amended AML introduces individual liability of a fine up to RMB 1 million (~USD 147,000) for legal representatives, principal person-in-charge or directly responsible persons of an undertaking if that individual is personally responsible for reaching an anticompetitive agreement.
- Public interest lawsuit: Public prosecutors can bring a civil public interest lawsuit against undertakings that have acted against social and public interests by engaging in anticompetitive conduct.

For more detail on the Amended AML, please refer to our client alert, China Amends Its Anti-Monopoly Law, published on June 29, 2022.

Proposed Amendments to six antitrust regulations and rules. On June 27, 2022, SAMR published draft amendments to the following six antitrust regulations and rules for public consultation, which aim to support and clarify the Amended AML (together, the “Proposed Amendments to the Implementing Rules”):

Regulations on Filing Thresholds for Concentrations of Undertakings
Provisions on Prohibition of Monopoly Agreements
Provisions on Prohibition of Abuse of Dominance
Provisions on Prohibition of Elimination and Restriction of Competition Through Intellectual Property Rights
Provisions on Prohibition of Elimination and Restriction of Competition Through Abuse of Administrative Powers
Provisions on Concentration of Undertakings

Among other draft amendments, SAMR proposed to revise the merger filing thresholds through first, increasing the existing thresholds and second, introducing a new threshold that aims at catching so-called “killer acquisitions,” where an established undertaking acquires a nascent competitor to preempt potential future competition. Specifically:

The Proposed Amendments to the Implementing Rules provide that undertakings must obtain merger clearance from SAMR if:
- The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.78 billion) (an increase from RMB 10 billion (~USD 1.48 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 118 million) (an increase from RMB 400 million (~USD 59 million)); or
- The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 592 million) (an increase from RMB 2 billion (~USD 296 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).
If the above thresholds are not met, undertakings are still required to obtain SAMR’s merger clearance if:
- One undertaking’s Chinese turnover is more than RMB 100 billion (~USD 14.8 billion); and
- The other undertaking has a market value (or valuation) of RMB 800 million or more and that it generated more than one third of its worldwide turnover from China.

There is currently no indication on when these Proposed Amendments to the Implementing Rules may come into effect.

Proposed Amendments to the Anti-Unfair Competition Law. On November 22, 2022, SAMR released draft amendments to the Anti-Unfair Competition Law for public consultation (“Proposed Amendments to the AUCL”). The Anti-Unfair Competition Law (the “AUCL”), which came into effect in 1993 and was revised in 2017 and 2019, addresses unfair and anticompetitive practices, such as misappropriation of trade secrets, trademark infringement, commercial bribery and false advertising. Consistent with China’s legislative focus in recent years, the Proposed Amendments to the AUCL expressly bring the digital economy within the ambit of the AUCL by adding a new Article 4 that expressly prohibits undertakings to take advantage of data and algorithms, technologies, capital advantages and platform rules to engage in unfair competitive behavior. The Proposed Amendments to the AUCL also include new types of prohibited conduct that concern the digital economy, such as:

Carrying out malicious transactions that obstruct or undermine another undertaking’s normal operations, including deliberately entering into large volume or high frequency transactions with another undertaking so as to trigger the online transaction platform’s disciplinary actions for countering fake transactions against the latter, maliciously ordering a large volume of goods from another undertaking within a short period of time without paying and maliciously returning or refusing to accept the goods after a bulk purchase from another undertaking (Article 14).
Using technological means or platform rules to improperly exclude or hinder the access to and transaction of goods or services lawfully provided by another undertaking (Article 17).
Improperly obtaining or using another undertaking’s commercial data (Article 18).
Using algorithms (e.g. by analyzing user preferences and transaction behavior) to impose unreasonable differential treatment or other unreasonable trading conditions (Article 19).

Another key feature of the Proposed Amendments to the AUCL is the reintroduction of the concept of a “position of relative advantage,” which was included in previous draft amendments to the AUCL that were released in 2016 but was not adopted in the current version of the law. Under the Proposed Amendments to the AUCL, “position of relative advantage” is defined to include advantage based on technologies, capital, number of users, industry influence or the degree of the transaction counterparty’s reliance on the undertaking in transactions. The Proposed Amendments to the AUCL set out a number of prohibited conduct that effectively extend the Amended AML’s rules governing the abuse of a dominant position to undertakings with a “position of relative advantage,” but without including the defence of procompetitive effects. Thus, an undertaking with a “position of relative advantage” is prohibited from, for example, coercing its transaction counterparty to bundle goods or sign exclusive agreements.

Like the Amended AML, the Proposed Amendments to the AUCL introduce increased and new penalties for violations. For example, undertakings could face penalties of up to 5% of its revenue if the violations are found to involve circumstances or damages deemed particularly serious to fair competition or public interest, and individuals who are found responsible for the violations may be fined up to RMB 1 million (~USD 147,000).

There is currently no indication on when the Proposed Amendments to the AUCL may come into effect.

Pilot Program on the Review of Simplified Procedure Merger Filings. In July 2022, SAMR announced a three-year pilot program to take place from August 1, 2022 to July 31, 2025, during which SAMR would delegate the initial review of certain simplified procedure merger filings to five provincial Administrations for Market Regulation (“provincial AMRs”) in Beijing, Shanghai, Chongqing, Shaanxi and Guangdong. Parties to transactions that require merger clearance would continue to submit the filings to SAMR, but SAMR may delegate cases to the provincial AMRs at its discretion and inform the filing parties of the delegation. While the provincial AMRs would review cases assigned to them, SAMR remains the final decision maker on all merger filings. Given that provincial AMRs are relatively inexperienced in merger control, it is expected that the review of delegated filings may take longer than usual to complete.

2. Merger Control

In 2022, SAMR unconditionally approved more than 99% of approximately 750 deals it reviewed and imposed conditions in only five transactions.

SAMR took on average 18 days to complete its review of cases under the simplified procedure, an increase from 2021’s 14-15 days, and an average of over 450 days to complete its review of conditionally approved cases, an increase from 2021’s 288 days. The delay is likely a result of China’s surge in COVID-19 cases since the first quarter of 2022 and the geopolitical climate that has affected the review of deals involving US tech companies.

Separately, SAMR announced that they penalized parties in 45 transactions for failure to notify, most of which received the maximum fine of RMB 500,000 (~USD 72,700). While this is less than the 107 transactions that SAMR penalized in 2021, over 50% of the cases in 2022 involved internet platforms.

2.1 Conditional Approval Decisions

GlobalWafers Co., Ltd. (“GlobalWafers”) / Siltronic AG (“Siltronic”). In January 2022, SAMR conditionally approved the Taiwanese silicon-wafer manufacturer GlobalWafers’ acquisition of its German rival Siltronic. SAMR raised a number of competition concerns regarding the transaction. Among other findings, SAMR noted that the transaction would likely result in the combined entity holding 55-60% and 30-35% market shares globally and in the Chinese market, respectively, and that the reduced number of competitors would likely increase the risk of coordination. To resolve these competition concerns, SAMR imposed both structural and behavioral remedies on the parties, including: (1) to divest GlobalWafer’s zone melting wafer business within six months; (2) to continue supplying wafer products to Chinese customers on fair, reasonable and nondiscriminatory (“FRAND”) terms; and (3) not to refuse customer requests to renew contracts without reasonable justification and to ensure that the renewal conditions are not inferior to terms in the original contracts.

Advanced Micro Devices (“AMD”) / Xilinx, Inc. (“Xilinx”). In January 2022, US chipmaker AMD received conditional approval from SAMR for its acquisition of its peer, Xilinx. SAMR had competition concerns over the impact that the transaction may have on the global and Chinese markets for central processing units (“CPUs”), graphics processing units (“GPUs”) and programable gate arrays (“FPGAs”), as (1) Xilinx ranked first in the global and domestic markets for FPGAs in 2020 with a market share of 50-55%, such that the combined entity would have a dominant position in the market; (2) CPUs, GPUs and FPGAs are core components that determine the performance of servers in data centers; as such, incompatibility and insufficient interoperability among these components may lead to performance issues for servers; and (3) the combined entity would become the sole supplier in the world capable of providing CPUs, GPUs and FPGAs.

To remedy these concerns, the parties offered a number of commitments, to which SAMR agreed, including the following: (1) to refrain from bundling or imposing unreasonable condition when supplying CPUs, GPUs and FPGAs in China; (2) to continue supplying CPUs, GPUs and FPGAs on FRAND terms; (3) to ensure that the parties’ CPUs, GPUs and FPGAs sold in China are interoperable with those from third-party manufacturers; (4) to ensure the flexibility, programmability and availability of Xilinx’s FPGAs; and (5) to keep third-party manufacturers’ competitive sensitive information strictly confidential.

II-VI Incorporated (“II-VI”) / Coherent, Inc. (“Coherent”). In June 2022, II-VI, an optoelectronic components maker, received conditional approval from SAMR for its acquisition of Coherent, a lasers supplier. SAMR found competition concerns resulting from the vertical relationship between the parties, namely II-VI being in the upstream markets for supplying components and Coherent being in the downstream markets for producing and selling laser devices. To remedy these concerns, SAMR imposed behavioral conditions on the parties, which will expire automatically in five years. These conditions include: (1) to continue performing all existing contracts; (2) to continue supplying CO2 laser optics to Chinese customers on FRAND terms; (3) to continue sourcing glass-based laser optics for excimer lasers from multiple suppliers on a non-discriminatory basis; not to reduce the number of suppliers without reasonable justification or increase II-VI’s current share of supply to Coherent unless other suppliers are unable to fulfil demands in terms of quantity and quality; and (4) to keep third-party manufacturers’ competitive sensitive information strictly confidential.

Shanghai Airport Group (“Avinex”) / Eastern Air Logistics (“EAL”). In September 2022, SAMR conditionally approved the proposed joint venture (“JV”) between Avinex and EAL. This is China’s first merger control remedy case that involves purely domestic entities. Avinex operates two international airports in Shanghai, Pudong Airport and Hongqiao Airport, and provides ground handling, supply chain management and logistics services for air freight. EAL offers air express shipping services and integrated ground handling and logistics solutions. The JV would provide smart airport cargo terminal services at Pudong Airport.

SAMR identified a horizontal overlap as Avinex, EAL and the JV provide air cargo terminal services at Pudong Airport, and a vertical overlap with Avinex and the JV’s upstream air cargo terminal services and EAL’s downstream air freight services. SAMR found that the JV would obtain a dominant position at the upstream air cargo terminal services market at Pudong Airport, in view of Avinex and EAL’s combined market share of over 70% and the market’s high entry barriers. SAMR also expressed concerns that China Eastern Airlines, the ultimate controller of EAL, could strengthen its market power in the downstream air freight services market by leveraging the JV’s dominance in the upstream market for air cargo terminal services. To ease competition concerns, SAMR imposed a range of behavioral remedies, including requiring the parties to provide air cargo terminal services on FRAND terms, keep separate their cargo terminal businesses at Pudong Airport and compete fairly as independent entities.

Korean Air Co., Ltd. (“Korean Air”) / Asiana Airlines, Inc. (“Asiana Airlines”). In December 2022, SAMR conditionally approved Korean Air’s proposed acquisition of Asiana Airlines. SAMR found that the transaction may restrict competition in the market of passenger air-transport services on 15 routes between China and South Korea. The parties offered a number of commitments to ease SAMR’s competition concerns, to which SAMR agreed, including the following: (1) to transfer takeoff and landing slots at specified airports to airlines seeking to commence air services on certain routes; (2) to maintain services of the Seoul-Guangzhou and Seoul-Dalian routes at the 2019 level in terms of flight frequency and number of passenger seats; and (3) to provide passenger ground services at South Korean airports to new Chinese market entrants on FRAND terms.

3. Non-Merger Enforcement

With regard to non-merger enforcement actions, SAMR and its local bureaus continue to target public utilities, healthcare, construction and platform companies. Two of the cases stood out in particular due to the scale of the business and the significant amount of fine:

Geistlich Pharma AG (“Geistlich”) – Resale Price Maintenance (“RPM”). In February 2022, the Beijing Administration for Market Regulation (“Beijing AMR”) fined Geistlich, a Swiss-owned pharmaceutical company specializing in regenerative medical devices, RMB 9.12 million (~USD 1.45 million) for engaging in RPM practices between 2008 and 2020. The fine represented 3% of the company’s revenue in China in 2020. The Beijing AMR found that the company included a resale pricing clause in distribution agreements and explicitly required, through in-person meetings, WeChat and other verbal communications, that distributors sell specified products at a price no lower than a certain percentage of its recommended prices. According to the Beijing AMR, Geistlich monitored the resale prices closely, rewarded distributors that complied with the resale price requirements and penalized those who did not follow the requirements by temporarily raising the purchase price of its products. The Beijing AMR noted that Geistlich’s conduct restricted competition in a market with high entry barriers, highlighting the fact that Geistlich is a global market leader with no local competition and thus creating an imbalance of bargaining power with distributors.

China National Knowledge Infrastructure (“CNKI”) – Abuse of Dominance. In December 2022, SAMR imposed a fine of RMB 87.6 million (~USD 12.6 million) on CNKI, which is China’s most renowned online academic database service provider, for abuse of dominance. The fine represented 5% of CNKI’s revenue in 2021. In concluding that CNKI is in a dominant position, SAMR emphasized CNKI’s market share (over 50% in the market of online database for Chinese-language academic literature), scale and coverage of users (cooperates with over 90% of universities in China) and volume and quality of content (possesses the largest number of high-quality academic journals). SAMR found that between 2014 and 2021, CNKI abused its dominant position by (1) imposing a price hike of over 10% of its average annual fees, which SAMR viewed as unreasonably excessive; and (2) signing exclusive cooperation agreements with academic journals and universities, which restricted the latter from cooperating with other academic databases.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Bonnie Tong (+852 2214 3762, btong@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

On October 7, 2022, the Department of Commerce Bureau of Industry and Security (“BIS”) released broad changes in the Export Administration Regulations (“EAR”) that together will create an effective embargo against providing to China the technology, software, manufacturing equipment, and commodities that are used to make certain advanced computing integrated circuits (“ICs”) and supercomputers. These changes include new restrictions on the participation by U.S. companies on enabling any semiconductor development or production at a facility in China[1] that manufactures or even potentially manufactures certain advanced ICs. BIS explained that it developed this sweeping set of new regulations to curtail China’s use of these items in the development of weapons of mass destruction, artificial intelligence and supercomputing-enhanced war fighting, and in technologies that enable violations of human rights. BIS further noted that these broad-based controls are necessary to address China’s mobilization of vast resources to support its defense modernization and the implementation of its “military-civil fusion” development strategy in ways that are contrary to U.S. national security and foreign policy interests.

BIS framed this new set of regulations as an interim final rule, which allows it to impose immediate controls with specified effective dates. Generally speaking, the new restrictions on exports of items associated with semiconductor manufacturing activities went into effect immediately on October 7, 2022, and the new restrictions on the exports of supercomputers, as well as associated parts, software, and technology, will come into effect on October 21, 2022. In addition, a new licensing requirement for support of foreign items destined for use in Chinese company development and production of ICs will become effective between these two dates, on October 12. In the table below we summarize almost 20 separate changes that BIS’s interim final rule is implementing in the coming weeks.

Effective Fri., Oct. 7, 2022 (U.S. Time)	Effective Wed., Oct. 12, 2022 (U.S. Time)	Effective Fri., Oct. 21, 2022 (U.S. Time)
15 C.F.R. § 740.2 (NEW restriction on license exceptions for certain ECCNs)	15 C.F.R. § 744.6 (NEW and Expanded controls on U.S. person’s ability to support China development of integrated circuits)	15 C.F.R. § 734.9(e) (Revised Entity List FDP Rule to add additional restrictions to 28 Chinese entities on the Entity List)
15 C.F.R. § 740.10 (Revised recordkeeping requirement for License Exception RPL)		15 C.F.R. § 734.9(h) (NEW Advanced Computing FDP Rule)
15 C.F.R. § 742.6 (NEW Regional Stability (“RS”) Controls for semiconductor manufacturing items sent to China)		15 C.F.R. § 734.9(i) (NEW Supercomputer FDP Rule)
>15 C.F.R. § 744.11(b) (NEW criteria for adding entities to the Entity List)		15 C.F.R. Part 734, Supplement No. 1 (NEW model certification for Advanced Computing FDP Rule)
15 C.F.R. § 744.23 (NEW semiconductor manufacturing end-use prohibitions)		15 C.F.R. Part 736, Supplement No. 1 (NEW Temporary General License for certain newly controlled activities)
15 C.F.R. Part 774, Supplement No. 1 (NEW ECCN 3B090 and Revised ECCNs 3B991, 3D001, and 3E001)		15 C.F.R. § 740.2 (NEW Restriction on License Exceptions for certain ECCNs) This is an expansion of the new controls implemented on Oct. 7, 2022.
		15 C.F.R. § 742.6 (NEW RS Controls for semiconductor manufacturing and advanced computing items to China) This is an expansion of the new controls implemented on Oct. 7, 2022.
		15 C.F.R. § 744.1 (NEW restrictions on supercomputer and semiconductor manufacturing end-use prohibitions)
		15 C.F.R. § 744.11 (NEW licensing requirements concerning expansion of Entity List FDP Rule and “Footnote 4” Entity List entities)
		15 C.F.R. § 744.23 (New supercomputer and semiconductor manufacturing end-use prohibitions) This is an expansion of the new controls implemented on Oct. 7, 2022.
		15 C.F.R. Part 744, Supplement No. 4 (NEW Footnote 4 added to 28 Chinese entities on Entity List to account for expansion of Entity List FDP Rules)
		15 C.F.R. § 762.2 (NEW recordkeeping requirement to retain Advanced Computing FDP Rule supply chain certificate)
		15 C.F.R. § 772.1 (NEW definition for “supercomputer” under the Commerce Control List (“CCL”))
		15 C.F.R. Part 774, Supplement No. 1 (Revised Note 3 to Category 3, Product Group A; Revised ECCNs 3A991, 3D001, 3E001, 4A994, 4D994, 4E001, 5A992, and 5D992; NEW ECCNs 3A090, 4A090, and 4D090)

On October 7, 2022, BIS also released a final rule adding 31 Chinese technology companies to the Commerce Department’s Unverified List. It also revised the criteria for inclusion on the Entity List to include an entity’s refusal or a host country’s continued interference in the ability of the entity to provide its bona fides or information to verify end-use checks. A concurrent rule issued by Commerce’s Export Enforcement division states that it will be applying a new, staged approach to adding companies to the Entity List where a foreign government interferes in end-use checks, essentially using the Unverified List as a first step.

We explain and outline the impacts of each of the new provisions below.

New Controls for Exports to China of Advanced IC, Advanced IC Manufacturing Equipment, and Associated Commodities, Software and Technology (15 C.F.R. §§ 740.2, 740.10, 742.6, and Part 774, Supplement No. 1)

One of the most consequential changes contained in the new regulations is the imposition of unilateral “Regional Stability” or RS controls on exports to China of advanced computing ICs, computer commodities that contain such ICs, and certain semiconductor manufacturing equipment, as well as associated software and technology. These new unilateral controls impose a license requirement for exports, reexports, and in-country transfers of identified items to or within China.

The new RS-based licensing requirement will be imposed in stages on a set of new and revised items defined by Export Control Classification Numbers (“ECCNs”). The new RS controls on certain semiconductor manufacturing items, as well as associated software and technology, became effective on October 7, 2022. Similar controls on certain advanced computing items will come into effect on October 21, 2022.

Effective October 7, 2022:
- New ECCN 3B090 to control certain semiconductor manufacturing equipment and specially designed parts, component, and accessories.
- Revised ECCNs 3B991, 3D001, and 3E001 to account for new RS controls and corresponding changes in light of new ECCN 3B090.
Effective October 21, 2022:
- New ECCNs 3A090, 4A090, and 4D090 to control specified high-performance ICs; certain computers, electronic assemblies, and components containing ICs; and associated software, respectively.
- Revised ECCNs 3D001, 3E001, and 4E001 for the software and technology associated with ECCNs 3A090, 4A090, and 4D090, as well as 5A992 and 5D992 for commodities and software that meet or exceed the performance parameters of ECCNs 3A090 or 4A090.

BIS further restricted access in China to the items described by these ECCNs by limiting the availability of most license exceptions for these items, including the widely used license exception for encryption items (referred to as “ENC”). Prior to this rule change, some advanced ICs did not require licensing when exported to China solely because they incorporated an information security functionality that could qualify for license exception ENC after certain classification, filing, and/or reporting requirements were met. Under the new rules, license exception ENC will not be available to overcome the new RS license requirements for items that also meet the classification criteria for ECCNs 3A090, 4A090, and the associated software and technology in 3D001, 3E001, 4D090, and 4E001.

Importantly, the new RS controls do not apply to deemed exports or deemed reexports.

BIS will review license applications to export, reexport, and transfer in-country RS-controlled items to PRC-IC fabricators under a presumption of denial. However, BIS will review applications for semiconductor manufacturing items destined to end users in China that are headquartered in the United States or in certain closely allied nations listed in Country Groups A:5 and A:6 on a case-by-case basis.

New Controls on Specified High-Performance Computing ICs and Commodities That Contain Them (15 C.F.R. Part 774, Supplement No. 1)

BIS is also adding new unilateral “anti-terrorism” or AT controls on the export of certain high-performance ICs, and their associated software and technology. These ICs can be found in a wide range of applications, including central processing units (“CPU”), graphics processing units (“GPU”), tensor processing units (“TPU”), neural processors, in-memory processors, vision processors, text processors, co-processors/accelerators, adaptive processors, and field-programmable logic devices (“FPLDs”). These new IC controls are described under ECCNs 3A991p and 4A994.l, and their corresponding software and technology controls under ECCNs 3D991, 3E991, 4D994, and 4E992, and exports, reexports, and transfers of these items to Iran, North Korea, and Syria will now require licensing.

Impact of New AT Controls on Certain Foreign National Employees in the United States – Deemed Exports

Whenever BIS identifies new technologies for control, companies and other organizations that employ foreign nationals in the United States need to consider whether the new controls will impose a requirement for them to obtain “deemed export” licenses. With respect to these new controls on these high-performance ICs and the commodities that contain them, BIS clarified that foreign national employees who did not previously require a license, but now do, will not require licensing unless they are provided access to new technology or software that exceeds the scope of the technology or software they received previously. For example, an Iranian national technologist who lawfully accessed technology or software specified in new ECCN paragraphs 3A991.p or 4A994.l prior to the effective date would not need a new license to continue receiving the same technology or software, but would require a license for the release of controlled technology or software different from that previously released, even if the technology or software is classified under the same ECCNs.

Although this clarification creates something of a safe harbor for existing national employees who support U.S. domestic companies with the development of high-performance ICs, the harbor is not particularly deep or wide, and we expect these new export controls to pose significant deemed export compliance challenges for many. Among other challenges, few companies would have already created detailed inventories of the specific software and technology its employees have access to that Commerce now controls with the new ECCNs prior to their creation last week. Moreover, even if and when such inventories are developed, the question of what would constitute the release of a new or different software or technology to the foreign national employee will immediately present itself. For example, would foreign national’s writing of new source code for the same piece of software be considered new? What if the employee is asked to work on design changes for a similar, but different IC than a company currently sells? Not only will many companies have significant difficulties identifying access to the newly controlled technologies, and then construing what releases of technology and software are new, but once they determine a license is needed, the companies and the foreign national employees will then be faced with a protracted period of uncertainty as BIS adjudicates the deemed export license application, a process that often takes between six and twelve months.

New and Expanded Foreign Direct Product (“FDP”) Rules

BIS is also significantly expanding the application of its existing Entity List FDP rules and creating two new FDP rules on advanced computing ICs and supercomputers. These rules come into effect October 21, 2022.

Entity List FDP Rule (15 C.F.R. §§ 734.9(e), 744.11, and Part 744, Supplement No. 4)

After early attempts to cut off the flow of U.S.-origin items to Huawei, BIS modified the national security-related control known as the Foreign Direct Product Rule to enable it to target a broader range of exports to specific companies that it has designated to the EAR Entity List (“Entity List FDP rule”). The Foreign Direct Product Rule concept is at the farthest end of U.S. efforts to extend its export controls jurisdiction extraterritorially because it applies to non-U.S.-origin items that are the direct products of specified U.S.-origin software and technology, or of “major components” or whole plants that are the direct product of this software and technology. BIS also has used new FDP rule modifications to limit the access by Russian and Belarusian military end users and military intelligence end users to commodities produced with controlled U.S. software and technology.

BIS has now expanded its Entity List FDP rule to cover 28 China-based entities that it had already designated to the Entity List over the last several years for their alleged participation in nuclear and other weapons of mass destruction proliferation, as well as surveillance and other human rights violations. Thus, in addition to requiring licenses for exports of U.S. origin items, any non-U.S. based exporters also will require U.S. export licenses to export, reexport or transfer items that are direct products of technology or software classified by the following ECCNs: 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002, or 5E991, as well as the direct product of any plant or “major component” of a plant that is the “direct product” of U.S.-origin “technology” or “software” that is specified in the ECCNs listed above. These ECCNs apply to most ICs, computers, telecommunications, and information security items controlled by Commerce.

BIS also has created two new, similarly structured FDP rules to target the export, reexport and transfer of foreign direct products used to develop or produce ICs and supercomputers for China-based manufacturers.

Advanced Computing FDP Rule (15 C.F.R. §§ 734.9(h), 762.2, and Part 734, Supplement No. 1)

The Advanced Computing FDP rule expands the scope of the EAR to certain items destined for China, as well as certain items produced in China. The rule is applicable whenever an exporter has “knowledge” (as defined under the EAR to cover actual knowledge and an awareness of a high probability, which can be inferred from acts constituting willful blindness) that the item is (1) destined for China or will be incorporated into any “part,” “component,” “computer,” or “equipment” (not designated EAR99) destined for China, or (2) the technology is developed by an entity headquartered in China for the “production” of a mask or an IC wafer or die. The foreign-produced items that are affected by this new rule include those items that are either:

(i) the “direct product” of “technology” or “software” subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991, or 5E002; and

- (a) are described by ECCNs 3A090, 3E001 (for 3A090), 4A090, or 4E001 (for 4A090); or
- (b) are ICs, computers, “electronic assemblies,” or “components” specified elsewhere on the CCL that meet the performance parameters of ECCNs 3A090 or 4A090;

(ii) or are produced by any complete plant or “major component” of a plant that is located outside the United States, when the plant or “major component” of a plant, whether made in the United States or a foreign country, itself is a “direct product” of U.S.-origin “technology” or “software” that meets the requirements discussed immediately above.

As a suggested compliance aid, BIS has provided a suggested (voluntary) sample certification that suppliers can complete to comply with this Advanced Computing FDP. See Supplement 1 to Part 734. In this certification, the supplier would assert that an item being provided will be subject to the EAR if a future transaction meets the destination scope outlined above. If a certificate is not provided by a supplier, BIS explains that the supplier’s customers will need to complete additional due diligence to determine if the item purchased is subject to the Advanced Computing FDP’s licensing requirement for onward exports to China. BIS further notes, however, that the certification alone should not be the only due diligence conducted before an export occurs. Moreover, BIS advises that entities outside of China that receive 3E001 for 3A090 technology from China should consider confirming that a license was obtained to export such technology from China, as the provisions of the Advanced Computing FDP also extend to certain items produced in China by China-based manufacturers. If no such license has been obtained, the item would have been exported from China in violation of the EAR. In addition, parties involved in supporting the transaction would be subject to the EAR’s General Prohibition 10, which prohibits any person from taking further action on a transaction with knowledge (see definition above) that a violation has occurred or is about to occur.

Supercomputer FDP Rule (15 C.F.R. §§ 734.9(i) and 772.1)

Similarly, BIS has now issued the Supercomputer FDP rule to expand the scope of the EAR to certain items destined for China whenever the exporter has “knowledge” that the foreign-produced item will be (1) used in the design, “development,” “production,” operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of a “supercomputer” (as defined in the EAR) located in or destined to China; or (2) incorporated into, or used in the “development,” or “production,” of any “part,” “component,” or “equipment” that will be used in a “supercomputer” located in or destined to the China.

The foreign-produced items affected by this new rule are as follows:

foreign-produced items that are the “direct product” of “technology” or “software” subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, 5E991, 5D002, or 5E002; or

are produced by any plant or “major component” of a plant that is located outside the United States, when the plant or “major component” of a plant, whether made in the United States or a foreign country, itself is a “direct product” of U.S.-origin “technology” or “software” that is specified in the ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, 5E991, 5D002, or 5E002.

As of October 21, 2021, “supercomputer” will be specifically defined under the EAR as “a computing “system” having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops within a 41,600 ft³ or smaller envelope.” Commerce’s definition for “supercomputer” is interesting in at least two ways. First, it appears that a large variety of advanced ICs can be used to create the level of computing power density outlined by the definition. Thus, this definition creates a kind of catch-all for computing power regardless of how it is achieved. Second, data center providers, and those who support them, may need to consider whether any specific data center could conceivably meet this computing power threshold.

Temporary General License (15 C.F.R. Part 736, Supplement No. 1)

Taken together, these new sets of RS, FDP, and ECCN-defined controls will have a significant impact on the ability of China-headquartered companies to obtain access to the commodities, technology and software required to manufacture ICs and Supercomputers. But a larger policy comes into focus when one considers a Temporary General License (“TGL”) that BIS issued alongside these controls.

The TGL authorizes companies headquartered in the United States or in a subset of other countries (those not headquartered in Country Groups D:1 or D:5 or E) to continue exporting certain ICs and associated software and technology for specified purposes to their affiliates and subsidiaries located in China through April 7, 2023, provided that none of the ultimate recipients of the items being manufactured with these products are located in China. The announced objective for the TGL is to mitigate the immediate disruption that these new controls will have on users of the TGL’s supply chains. Once the TGL expires in April 2023, exporters will need to apply for an individually validated export license to export such advanced computing chips, assemblies containing them, and related software and technology to China for supply chain-related activities, such as assembly, inspection, quality assurance, and distribution. These applications will carry a presumption of denial, although license applications for semiconductor manufacturing items destined to end users in China that are headquartered in the United States or in certain closely allied nations listed in Country Groups A:5 and A:6 will be reviewed on a case-by-case basis.

The TGL allows, at least until April 7, 2023, companies to continue exporting the following items:

ECCNs 3A090, 4A090, and associated software and technology in ECCNs 3D001, 3E001, 4D090, or 4E001; and

any item that is a computer, IC, “electronic assembly” or “component” and associated software and technology, specified elsewhere on CCL which meets or exceeds the performance parameters of ECCNs 3A090 or 4A090.

The TGL’s expiry in April 2023 provides but a short time for U.S. and other Group A:5 and A:6 headquartered companies to find alternative fabricators for ICs. Other non-China based fabricators may already be at capacity, and the timeline for bringing new fabrication facilities online and qualifying them to produce new ICs is far longer than the timelines currently contemplated by the TGL.

New End-User/End-Use Controls (15 C.F.R. §§ 744.1 and 744.23)

The new regulations also restrict China’s access to ICs and supercomputing through the imposition of new end-user and end-use controls. These controls are knowledge-based controls that require exporters to seek BIS licensing when they know, are informed, or are otherwise unable to determine that their exports will be put to certain end uses.

On October 7, 2022, these end-user/end-use prohibitions were extended to the following:

any item subject to the EAR used in the “development” or “production” of ICs at a semiconductor fabrication “facility” located in China which fabricates certain ICs such as advanced logic, NAND, and DRAM ICs;

any item subject to the EAR and classified in an ECCN in Product Groups B, C, D, or E in Category 3 of the CCL when the individual or entity knows the item will be used in the “development” or “production” of ICs at any semiconductor fabrication “facility” located in China, but for which the individual or entity does not know whether such semiconductor fabrication “facility” fabricates advanced ICs; and

any item subject to the EAR for which the individual or entity will be used in the “development” or “production” in China of any “parts,” “components” or “equipment” specified under ECCNs 3B001, 3B002, 3B090, 3B611, 3B991, or 3B992.

On October 21, 2022, these end-user/end-use prohibitions also will apply to certain “supercomputers” as defined under the EAR, namely:

any IC subject to the EAR and specified in ECCNs 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992 when the individual or entity knows the item will be used in (1) the “development,” “production,” “use,” operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of a “supercomputer” located in or destined to China; or (2) incorporation into, or the “development” or “production” of any “component” or “equipment” that will be used in a “supercomputer” located in or destined to China; and

any computer, “electronic assembly,” or “component” subject to the EAR and specified in ECCNs 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992 when the individual or entity knows the item will be used for the activities described above.

Commerce notes that it will review all end-user/end-use license applications with a presumption of denial, but that it will consider license applications for semiconductor manufacturing items destined to end users in China that are headquartered in the United States or in certain closely allied nations listed in Country Groups A:5 and A:6 on a case-by-case basis.

Activities of U.S. Persons (15 C.F.R. § 744.6)

Effective October 12, U.S. persons will be prohibited from engaging in certain activities, even when dealing with items that are non-U.S. origin.

Specifically, BIS will now require U.S. persons to apply for licenses to facilitate or engage in shipping, transmitting or transferring to or within China the following products:

any item not subject to the EAR that the individual or entity knows will be used in the “development” or “production” of ICs at a semiconductor fabrication “facility” located in China that fabricates certain ICs such as advanced logic, NAND, and DRAM ICs; or in the servicing of any such items;

any item not subject to the EAR and meeting the parameters of any ECCN in Product Groups B, C, D, or E in Category 3 of the CCL that the individual or entity knows will be used in the “development” or “production” of ICs at any semiconductor fabrication “facility” located in China, but for which the individual or entity does not know whether such semiconductor fabrication “facility” fabricates certain ICs such as advanced logic, NAND, and DRAM ICs; or in the servicing of any such items; or

any item not subject to the EAR and meeting the parameters of ECCNs 3B090, 3D001 (for 3B090), or 3E001 (for 3B090) regardless of end use or end user; or in the servicing of any such items.

Commerce will review all such license applications with a presumption of denial, although license applications for semiconductor manufacturing items destined to end users in China that are headquartered in the United States or in certain closely allied nations listed in Country Groups A:5 and A:6 will be reviewed on a case-by-case basis.

Additions to Unverified List (“UVL”) and Changes to Entity List Designation Criteria (15 C.F.R. § 744.11(b))

The new final rule adds specific criteria for designation to the more restrictive Entity List:

an entity precludes access to, refuses to provide, or provides false or misleading information related to the parties to the export transaction or the underlying item; or
where there is a sustained lack of cooperation by the entity’s host government to facilitate end-use checks of entities on the UVL.

In a related statement of a new policy in line with these changes in the final rule, BIS laid out a two-step process whereby companies that do not complete requested end-use checks within 60 days will be added to the UVL, and if those companies are added to the UVL due to the host country’s interreference, after a subsequent 60 days of the end-use check not being completed, the company on the UVL will be transferred to the Entity List.

The new policy states that for all companies currently on the UVL as of the date of the policy (October 7, 2022), including the 31 new China company additions, the 60-day “escalation” clock begins immediately.

________________________

[1] As a reminder, under current U.S. export controls, China also includes the Hong Kong Special Administrative region after the United States revoked Hong Kong’s special status under U.S. law in 2020.

The following Gibson Dunn lawyers prepared this client alert: Christopher Timura, Chris Mullen, Judith Alison Lee, David A. Wolber, Adam M. Smith, and Stephenie Gosnell Handler.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following members and leaders of the firm’s International Trade practice group:

United States
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, shandler@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Annie Motto – Washington, D.C. (+1 212-351-3803, amotto@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212-351-3972, spongrace@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)

Europe
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0) 207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

China has finally amended its Anti-Monopoly Law, which will come into force on 1 August 2022 (the “Amended AML”).[1] The Amended AML has been more than two years in the making: the State Administration for Market Regulation (“SAMR”) first proposed amendments in early 2020 and a formal draft amendment was submitted to the Standing Committee of the National People’s Congress for a first reading on 19 October 2021 (the “Draft Amendment”).[2]

This client alert summarizes the main changes bought into effect by the Amended AML.

1. Changes to the Merger Review Process

Review of non-threshold transactions

Article 19 of the Amended AML enables SAMR to require parties to a concentration (where the concentration does not otherwise trigger mandatory reporting obligations) to notify the transaction where “the concentration of undertakings has or may have the effect of eliminating or restricting competition.”[3] Presumably, the obligation to submit a notification means that parties cannot close the transaction prior to obtaining clearance.

It is hard to say what practical effect Article 19 will have (if any). On the one hand, the introduction of this provision at least signals that SAMR seeks broader powers to review below threshold transactions. On the other hand, SAMR already had the right to review (although it did not have the power to require that parties notify) below threshold transactions under the State Council Regulation on the Notification Thresholds for Concentrations of Undertakings, but such power has rarely been exercised. The significance of Article 19 will be directly influenced by both SAMR’s appetite to formally review below threshold transactions, and its capacity to deal with such cases over and above its mandatory filing caseload.

Introduction of the stop-clock system

The Amended AML grants SAMR the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree.[4] The clock resumes once the circumstances leading to the suspension are resolved. As noted in our previous client alert, it seems that this mechanism may be used to replace the “pull-and-refile” in contentious merger investigations.

This stop-clock system may lead to significantly longer investigations.

2. Changes to the Rules on Anticompetitive Agreements

Abandoning per se treatment for resale price maintenance (“RPM”)

The Amended AML introduces a provision which states that a monopoly agreement between counterparties fixing the price or setting a minimum price for resale of goods to a third party “shall not be prohibited if the undertaking can prove that it does not have the effect of eliminating or restricting competition.”[5] This provision essentially codifies the landmark 2018 decision of the Supreme People’s Court of China in Hainan Provincial Price Bureau v. Hainan Yutai Scientific Feed Company (“Yutai”).[6] In that case, the SPC addressed the divergent approaches taken by the Chinese antitrust authorities and the Chinese courts in respect of RPM, whereby the former treated RPM agreements as per se illegal, while the latter adopted a “rule of reason” approach. The SPC clarified that although Chinese antimonopoly authorities are able to rely on the presumption that RPM agreements eliminate or restrict competition and thus are illegal, this presumption is rebuttable by the undertaking adducing sufficient evidence to prove that the RPM agreement does not eliminate or restrict competition.

The Amended AML brings the legislation in line with Yutai, meaning that where a plaintiff alleges breach of the AML by way of a RPM agreement, it is open to a defendant to prove that the RPM agreement does not eliminate or restrict competition and therefore is not unlawful.

Safe harbours for vertical monopoly agreements

The Amended AML introduces a “safe harbour” for vertical monopoly agreements, in circumstances where “undertakings can prove that their market share in the relevant market is lower than the standards set by the anti-monopoly law enforcement agency of the State Council and meet other conditions set by the anti-monopoly law enforcement agency of the State Council shall not be prohibited.”[7] This provision authorises SAMR to determine the threshold for the safe harbour, which we can expect in due course. The scope of the safe harbour under the Amended AML is narrower than that proposed under the Draft Amendment, which applied to both horizontal and vertical monopoly agreements. By contrast, it is clear from the Amended AML that the safe harbour only applies to vertical agreements, including, presumably, RPM agreements.

Cartel facilitators

The Amended AML provides that undertakings “may not organize other undertakings to reach a monopoly agreement or provide substantial assistance for other undertakings to reach a monopoly agreement.”[8] This provision fills an arguable gap in the current AML, which means that cartel facilitators e.g., third parties that aid the conclusion of anti-competitive agreements or cartels, may be found in breach of the Amended AML.

3. Increase in Fines Imposed

The Amended AML substantially increases the potential fines that could be imposed on different parties, and creates new fines. These include:

Penalties on cartel facilitators. As explained above, under the Amended AML cartel facilitators will be liable for their conduct. They risk penalties of not more than RMB 1 million (~$149,000).[9]

Increased penalties for merger-related conduct. One of the commonly cited weaknesses of the current AML is the very low fines for parties failing to file or gun jumping (limited to RMB 500,000). The Amended AML now states that where an undertaking implements a concentration in violation of the AML, a fine of less than 10% of the sales from the preceding year shall be imposed.[10] Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~$745,000).

Superfine. The Amended AML introduces a multiplier clause, pursuant to which SAMR can multiply the amount of the fine by a factor between 2 and 5 in case it is of the opinion that the violation is “extremely severe”, its impact is “extremely bad” and the consequence is “especially serious”.[11] There is no definition of what these terms mean and this opens the door to very significant and potentially arbitrary fines.

Penalties for failure to cooperate with investigation. Where an undertaking refuses to cooperate in anti-monopoly investigations, e.g. providing false materials and information, or conceals, destroy or transfer evidence, SAMR has the authority to impose a fine of less than 1% of the sales from the preceding year, and where there are no sales or the data is difficult to be assessed, the maximum fine on enterprises or individuals involved is RMB 5 million (~$745,000) and RMB 500,000 (~$75,000) respectively.

Penalties on individuals. The Amended AML introduces individual liability for legal representatives, principal person-in-charge or directly responsible persons of an undertaking if that person is personally responsible for reaching an anticompetitive agreement. A fine of not more than RMB 1 million (~$149,000) can be imposed on that individual.[12] At this stage, however, cartel leniency is not available to individuals.

Public interest lawsuit. Finally, under the Amended AML, public prosecutors (i.e. the people’s procuratorate) can bring a civil public interest lawsuit against undertakings they have acted against social and public interests by engaging in anticompetitive conduct.

4. Further Targeting of the Digital Economy

Regulating the digital economy continues to be a focus of China’s legislative agenda. In 2021, SAMR published specific guidelines on the application of the AML to platforms. The Amended AML further targets the digital economy by adding language which prevents undertakings from “us[ing] data and algorithms, technologies, capital advantages, platform rules, etc. to engage in monopolistic behaviour prohibited by this Law.”[13] This principle appears to apply to all monopolistic behaviour prohibited by the Amended AML, including monopoly agreements between undertakings, and is not limited to cases of abuse of market dominance.

In respect of abuse of market dominance, the Amended AML specifically adds that “[an] undertaking with a dominant market position shall not use data, algorithms, technologies, platform rules, etc. to engage in the abuse of a dominant market position as prescribed in the preceding paragraph”, which refers to the full list of acts considered to be abuse of dominant position.[14]

__________________________

[1] Decision of the Standing Committee of the National People’s Congress on Amending the Anti-Monopoly Law of the People’s Republic of China (24 June 2022) available at http://www.npc.gov.cn/npc/c30834/202206/e42c256faf7049449cdfaabf374a3595.shtml.

[2] National People’s Congress of the People’s Republic of China, “Draft Amendment to the Anti-Monopoly Law” (中华人民共和国反垄断法(修正草案)) (released on October 25, 2021), available at http://www.npc.gov.cn/flcaw/flca/ff8081817ca258e9017ca5fa67290806/attachment.pdf. See our client alert, China Publishes Draft Amendment to the Anti-Monopoly Law, published on 27 October 2021.

[3] Amended AML, Article 26.

[4] Draft Amendment, Article 32.

[5] Amended AML, Article 18.

[6] See our client alert Antitrust in China – 2019 Year in Review, for more detailed discussion of Yutai.

[7] Amended AML, Article 18.

[8] Amended AML, Article 19.

[9] Amended AML, Article 56.

[10] Amended AMl, Article 58.

[11] Amended AML, Article 63.

[12] Amended AML, Article 62.

[13] Amended AML, Article 9.

[14] Amended AML, Article 22.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in Hong Kong:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Hayley Smith (+852 2214 3734, hsmith@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Ali Nikpay – London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The Uyghur Forced Labor Prevention Act (“UFLPA” or “Act”)—and its stringent import restrictions—took effect on June 21, 2022.[1] The Act, the latest effort by the United States concerning the Uyghur population in China’s Xinjiang Uyghur Autonomous Region (the “XUAR” or “Xinjiang”), greatly increases the showing that companies need to make to prove that goods produced in the XUAR, in full or in part, are entitled to entry into the United States. All products manufactured in the region or produced by a list of entities that have now been designated by the interagency Forced Labor Enforcement Task Force (“FLETF”) are presumptively barred from entry into the United States unless the importer can present “clear and convincing” evidence that the product has not been tainted by the use of forced labor.[2]

As U.S. Customs and Border Protection (“CBP”) begins to enforce the Act, importers of certain products and products that may incorporate raw materials or manufactured parts or components that are suspected to have touchpoints with the XUAR or with several of China’s “anti-poverty alleviation” programs should be aware of heightened diligence and supply chain tracing requirements necessary to rebut the UFLPA’s presumptive import ban on XUAR-linked shipments.

I. Background

As we have shared in past client alerts, the UFLPA is the latest in a long line of U.S. executive and legislative efforts targeting alleged forced labor in the supply chains of goods entering the United States.

For nearly a century, the 1930 Tariff Act has authorized CBP to prevent the importation of “[a]ll goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by . . . forced labor” by issuing Withhold Release Orders (“WROs”).[3] CBP’s authority under the Tariff Act was strengthened in 2016 when Congress eliminated a loophole that allowed importation of merchandise made with forced labor if the merchandise was not also available in the United States in quantities sufficient to meet U.S. consumptive demand.[4]

More recently, the U.S. reaffirmed its broad commitment to preventing imports tainted by forced labor in the 2020 United States-Mexico-Canada Agreement (“USMCA”). Under this free trade agreement, each North American country agreed to “prohibit the importation of goods into its territory from other sources produced in whole or in part by forced or compulsory labor.”[5] To oversee the implementation of this commitment, former President Trump issued an executive order creating the FLETF, chaired by the Secretary of Homeland Security and including representatives from the Departments of State, Treasury, Justice, Labor, and the Office of the U.S. Trade Representative.[6]

The measures described above target forced labor wherever it occurs, but, in recent years, the U.S. has focused increasingly on allegations of forced labor and other human rights abuses in the XUAR. New legislation authorized sanctions for these alleged abuses in 2020,[7] and, in 2021, CBP’s heightened scrutiny of imports from the XUAR led to a region-wide WRO affecting cotton and tomato imports[8] and an additional WRO targeting silica-based products from Xinjiang.[9]

After passing both houses of Congress with broad bipartisan support, President Biden signed the UFLPA into law on December 23, 2021.[10] The UFLPA represents the U.S.’s most forceful effort to date to address this issue in the XUAR. Experts estimate that the UFLPA will have an impact on the global economy “measured in the many billions of dollars.”[11]

The Act’s reach is broad, presumptively banning the importation of “any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in” the XUAR, as well as those produced by a number of entities identified by the FLETF.[12] To rebut this presumptive ban, importers must show: (1) their compliance with all of the Act’s implementing regulations and FLETF’s due diligence guidance,[13] (2) that they responded “completely and substantively” to all agency inquiries,[14] and (3) “clear and convincing evidence” that their goods were not produced with forced labor.[15]

II. FLETF Enforcement Strategy

The Act requires the FLETF to promulgate an enforcement strategy[16] which will include specific guidance to importers regarding due diligence, the amount and type of evidence that importers will need to show to rebut the Act’s presumption, and what entities will be presumptively barred.[17] In the months following the UFLPA’s enactment, the FLETF solicited input from the public to inform its eventual Enforcement Strategy,[18] holding a public hearing,[19] and receiving 180 written comments from U.S. and foreign businesses, industry associations, civil society, academics, and private individuals.[20] After the close of this public comment period, the FLETF published its enforcement strategy and submitted it as a report to Congress on June 17, 2022.[21] To supplement this strategy, CBP published “Operational Guidance for Importers“ on June 13, 2022.[22]

A. The UFLPA Entity Lists

In addition to presumptively prohibiting imports originating, in whole or in part, in the XUAR, the UFLPA’s rebuttable presumption extends to goods, wares, articles, and merchandise produced by various entities identified by the FLETF in its enforcement strategy.[23] These include entities that work with the XUAR government to recruit, transport, or receive alleged forced labor from the XUAR, as well as entities that participate in “poverty alleviation” and “pairing-assistance” programs in the XUAR.[24] These PRC government-administered labor programs reportedly target Uyghurs, Kazakhs, Kyrgyz, Tibetans, and other persecuted groups, placing them in farms and factories in the XUAR and across China. Workers in these schemes are reportedly subjected to systemic oppression through forced labor.[25] In “pairing-assistance” programs, for example, Chinese companies are reportedly encouraged to create satellite factories in the XUAR that then rely on internment camps for low-skilled labor.[26] The FLETF found that indicators of forced labor are particularly strong across the four sectors it has identified as high-priority sectors for enforcement under the UFLPA: apparel, cotton, silica-based products, and tomatoes.[27]

The UFLPA Entity List[28] that the FLETF published on June 17 remains relatively narrow, including only entities subject to existing WROs or listed to the Department of Commerce Bureau of Industry and Security’s (“BIS”) Entity List for their use of forced labor.[29] Notably, no downstream solar cell or solar module producers have been added to the UFLPA Entity List at this time, which was a specific concern raised by some in the solar industry.[30] A number of Chinese polysilicon firms, however, are listed.

However, the Act requires the FLETF to update the UFLPA Entity List at least annually, and the whole-of-government approach that the FLETF will be taking to identify new entities suggests that the FLETF could be aggressive in its designation of new Chinese entities linked to forced labor violation allegations going forward.

B. Priority Sectors for Enforcement

As part of its enforcement strategy, the UFLPA requires the FLETF to identify a list of “high-priority sectors for enforcement,” which the statute indicates must include cotton, tomatoes, and polysilicon.[31]

The enforcement strategy published on June 17, 2021 does not stray significantly from the statutorily mandated list of high-priority sectors. It expands this list slightly to include:

1. 1. 1. Apparel;
    2. Cotton and cotton products;
    3. Silica-based products (including polysilicon); and
    4. Tomatoes and downstream products.

However, since there is no de minimis exception in the Act, importers of a wide range of products may find their products the target of a potential exclusion order, detention or seizure. To illustrate, in its report to Congress, CBP notes that these silica-based products may include aluminum alloys, silicones, and polysilicon, which are themselves used in building materials, automobiles, petroleum, concrete, glass, ceramics, electronics, and solar panels, among other goods. Especially for importers with final products or with products that may have any of the foregoing as material inputs, importers will need to be familiar with and meet the evidentiary burden in reference to the entire supply chain, no matter how small or remote a supplier’s input may be to a final product.[32]

For XUAR-linked cotton, tomatoes, and polysilicon, CBP has published specific guidance on supply chain documentation that may be necessary to overcome the UFLPA’s rebuttable presumption against importation. While this recommended documentation varies slightly across the three sectors, at a high level, CBP recommends the following:

1. 1. 1. Documentation showing the entire supply chain;
    2. A flow chart mapping all steps of the procurement and production processes;
    3. Maps of the region(s) where the production processes occur; and
    4. A list of all entities involved in each step of the production processes, with citations denoting the business records used to identify each upstream entity with whom the importer did not directly transact.

The CBP’s enforcement of the UFLPA’s presumptive import ban on each of these high-priority sectors will have a substantial effect on global supply chains involving these products. More than 40 percent of the world’s polysilicon, a quarter of its tomato paste, and a fifth of its cotton supplies originate in the XUAR.[33] Industry groups from these targeted sectors have already begun to prepare for increased scrutiny and mitigate the threat of supply shortages by developing industry-wide standards for supply chain traceability.[34] Even these standards, however, may not be sufficient to overcome the presumption that products which incorporate any amount of material sourced from the XUAR have been produced with prohibited labor inputs.

C. Guidance on Effective Due Diligence & Supply Chain Tracing

As a key element of their rebuttal to the UFLPA’s presumption, importers must show that they have complied with CBP and FLETF guidance on due diligence, including effective supply chain tracing and supply chain management practices. In its enforcement strategy, the FLETF outlines critical elements of this due diligence process, while also raising concerns that effective diligence may not always be possible in the XUAR.

1. Effective Due Diligence

The FLETF strategy refers largely to the Department of Labor’s Comply Chain program[35] in defining the elements of an effective due diligence system. These elements include:

1. 1. 1. Engaging stakeholders and partners;
    2. Assessing risks and impacts;
    3. Developing a code of conduct;
    4. Communicating and training across the supply chain;
    5. Monitoring compliance;
    6. Remediating violations;
    7. Independent reviews; and
    8. Reporting performance and engagement.

However, FLETF raises concerns that some of these elements may not be possible when dealing with goods made in the XUAR or made using the labor of workers from certain PRC labor schemes. For example, the FLETF notes that importers may be unable to sufficiently engage with stakeholders, such as employees of its suppliers, or conduct credible audits due to restrictions on access to Xinjiang and reported government surveillance and coercion that renders witnesses unable to speak freely about working conditions.[36] At a minimum, because of these concerns, audits of compliance by suppliers and subcontractors in the XUAR must “go beyond traditional auditing.” The FLETF suggests that importers may need to use technology or partnerships with civil society to collect evidence to rebut the presumption, but does not provide more concrete guidance on the what technology and partnerships will be deemed by CBP to provide credible evidence.[37]

Additionally, an importer’s ability to conduct due diligence and remediate violations may be limited by Chinese laws, such as the PRC’s Anti-Foreign Sanctions Law. In fact, the FLETF received written comments from industry groups reporting that the Chinese government had retaliated against Chinese companies for complying with U.S. requirements to eliminate supply chain inputs from the XUAR.[38]

2. Effective Supply Chain Tracing

At a minimum, importers seeking to rebut the UFLPA’s presumption must conduct a complete mapping of the supply chains that provide inputs to their products, “up to and including suppliers of raw materials used in the production of the imported good or material.”[39] Per the FLETF enforcement strategy, effective supply chain mapping must go beyond a mere list of names of suppliers and their sub-tiers and include accounts of the conditions under which work is being done on the inputs at each step in the sourcing process.[40]

In addition to mapping, the FLETF strategy emphasizes the importance of identity preservation and segregation to prevent the commingling of inputs at any point in the supply chain. This risk is particularly high for importers whose suppliers source raw or partially processed material inputs from both Xinjiang and areas outside of the XUAR. Without strong identity preservation or segregation protocols, these importers risk their shipments being detained because of the difficulty of verifying that their supply chain uses only non-Xinjiang inputs.

3. Effective Supply Chain Management Measures

The FLETF defines “supply chain management measures” as those measures “taken to prevent and mitigate identified risks of forced labor.”[41] Such measures may involve processes to vet potential suppliers for forced labor prior to contracting or outlining specific consequences for a supplier’s breach of its forced labor commitments. Practically speaking, the design and implementation of these measures will require robust information systems to manage and regularly update supply chain data.

Notably, however, an importer’s ability to demand these supply chain management measures may be limited by the leverage it holds over its suppliers and its visibility into its supply chains. Therefore, importers with static supply chains involving long-term fulfillment contracts may be better positioned to enforce such measures than those participating in one-time transactions involving a supply chain with frequently changing inputs.

D. Guidance on the “Clear and Convincing” Standard

Neither the FLETF’s enforcement strategy nor CBP’s operational guidance clearly define the contours of the “clear and convincing” standard for evidence necessary to rebut the UFLPA’s presumption. In a series of unrecorded webinars, however, CBP officials have stated that they view this standard as higher than a preponderance of the evidence standard and will require a much greater showing than the current standard required for WROs.[42] CBP indicated that it would model its interpretation of this “clear and convincing evidence” standard on the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) which it also applies to enforce import prohibitions on North Korea.[43]

As in the UFLPA, under CAATSA, only “clear and convincing evidence” can rebut the presumption that all North Korean labor is forced labor.[44] CBP interprets CAATSA’s “clear and convincing” standard to mean “highly probable,”[45] suggesting that the burden will only be met “if the material [] offered instantly tilt[s] the evidentiary scales in the affirmative when weighed against the evidence . . . offered in opposition.”[46]

Under this standard, much evidence which might have been sufficient under the WRO standard will not be adequate to rebut the presumption of exclusion. For example, while CBP staff indicated that supplier audits might be relevant evidence in determining whether forced labor was used while producing detained goods,[47] audits are likely insufficient on their own to overcome UFLPA’s presumption.[48] Amidst allegations of surveillance and harassment of auditors in the XUAR, employees may not feel free to fully discuss their employers, working conditions, or governmental programs, and local suppliers might limit the access of auditors to the premises.[49] As such, CBP staff implied that even third-party audits will be presumptively defective unless the company presents sufficient evidence to convince the agency of the audit’s independence and effectiveness.[50] Amidst these uncertainties, it is more likely that CBP will find that no one piece of evidence is sufficient on its own, and that importers’ efforts to support their arguments with multiple pieces of evidence will be more likely to be accepted as compelling by CBP.[51]

Furthermore, the fact that a product has received an exception to the presumption in the past is not a guarantee that the same supply chain will be approved in the future. While CBP stated that evidence of past exceptions is clearly relevant and should be submitted to the agency, it has not given any definitive rule regarding past exceptions.[52] However, this does imply that importers using more regular supply chains, involving the same suppliers and sub-tier suppliers over time, will be able to more easily provide clear and convincing evidence than will importers using less-regular supply chains.

III. Enforcement Procedures

A. Enforcement Timeline

The UFLPA’s changes to CBP’s mandate and authorities became effective on June 21, 2022. Going forward, CBP will review each shipment for UFLPA applicability on a case-by-case basis, based on the UFLPA Entity List and a variety of other sources.

The UFLPA’s shortened timeline for CBP’s identification of dispositioning of potentially problematic imports places a premium on supplier planning and preparation. Under UFLPA, CBP derives its detention authority from 19 CFR § 151.16, making the timeline for enforcement much shorter than under the preexisting WROs.[53] As opposed to the 90-day period under a WRO, importers whose shipments have been detained pursuant to the UFLPA have only 30 days to challenge this detention.

After a shipment has been presented for examination, CBP will have five days, excluding weekends and holidays, to determine whether the shipment should be released or detained.[54] If CBP determines that a shipment falls within the scope of the UFLPA—either based on links to the XUAR or to listed entities—CBP will issue a detention notice instructing the importer to submit information rebutting the UFLPA’s presumption.[55] After 30 days, CBP is required to issue a final ruling on the goods’ admissibility.[56]

Because of this accelerated timeline for review, CBP has emphasized that importers should be prepared to submit evidence in support of their requests promptly and in accessible formats, noting that submitting documentation in English will facilitate an efficient review.[57] In turn, CBP will attempt to prioritize requests from importers who are Customs Trade Partnership Against Terrorism (CTPAT) Trade Compliance members in good standing.[58]

If CBP issues a final ruling excluding the shipment, the importer may protest that decision within 180 days.[59] CBP then has 30 days to respond to the protest, after which it will be deemed denied.[60] Having exhausted this administrative procedure, importers then have 180 days from the denial of the protest to file a court action challenging CBP’s ultimate decision.[61]

Certain shipments determined to be in violation of the UFLPA may be subject to seizure and forfeiture.[62] In an unrecorded webinar on June 7, 2022, however, CBP officials indicated that seizure would only occur in cases of obvious fraud, as opposed to good faith mistakes.[63]

B. Challenging Detention of a Shipment

An importer whose shipment has been detained pursuant to the UFLPA can pursue two different claims to obtain the release of their merchandise: (1) that the shipment is not subject to the UFLPA, and (2) that the shipment is entitled to an exception from the UFLPA.

Though both can result in a released shipment, these two claims apply in very different situations. The former arises when an importer alleges that their shipment does not contain any inputs linked to the XUAR or entities on the UFLPA Entity List. In contrast, the latter arises if the importer can prove that—even though the shipment is linked to the XUAR or an entity of the UFLPA entity list—no part of the shipment was produced with forced labor.

1. For Imports Not Subject to the UFLPA

A shipment is considered outside the scope of the UFLPA’s rebuttable presumption if both the imported goods and their inputs are “sourced completely from outside Xinjiang and have no connection to the UFLPA Entity List.”[64]

CBP’s operational guidance indicates that importers looking to establish that a shipment is not subject to the UFLPA must make showings under both of the following categories of evidence: (1) supply chain mapping information, and (2) evidence that the goods were not mined, produced, or manufactured wholly or in part in the XUAR. The former should include evidence pertaining to the overall supply chain, as well as to merchandise or any component thereof as well as to the miner, producer, or manufacturer. CBP’s guidance provides non-exhaustive examples of the types of evidence that might satisfy these requirements.

2. For Imports Subject to UFLPA’s Rebuttable Presumption

In contrast, shipments are subject to the UFLPA if they contain goods that are either “mined, produced, or manufactured wholly or in part in” the XUAR or produced wholly or in part by an entity on the UFLPA entity. These shipments will only be released if the importer requests an “exception” to the UFLPA and can demonstrate (1) their compliance with all of the Act’s implementing regulations and FLETF’s due diligence guidance,[65] (2) that they responded “completely and substantively” to all agency inquiries,[66] and (3) “clear and convincing evidence” that their goods were not produced with forced labor.[67]

To meet these requirements, CBP states that an importer must make a showing under each of the following categories of evidence:

1. 1. 1. Due Diligence System Information
    2. Supply Chain Tracing Information
    3. Information on Supply Chain Management Measures
    4. Evidence Goods Originating in China Were Not Mined, Produced, or Manufactured Wholly or In Part by Forced Labor

In its guidance, CBP provides a non-exhaustive list of evidence that may be able to satisfy these requirements. If CBP determines that this evidence is “clear and convincing,” the presumption will be rebutted and the goods will be released under an exception to the Act. Within 30 days of any decision to grant an exception to the UFLPA, CBP must submit a publicly available report to Congress, outlining the evidence supporting this exception.[68] However, importers may seek to have certain information withheld from the public report pursuant to any applicable exemptions contained in the Freedom of Information Act.[69]

C. Predicting Enforcement Strategies and Trends

While the government has expressed an intent to enforce the UFLPA to its fullest extent, CBP resources are finite. In the immediate future, therefore, we expect to see enforcement focused on the UFLPA Entity List and on the four sectors identified by the FLETF as high-priority sectors: apparel, cotton, silica-based products, and tomatoes. Beyond these key sectors, CBP’s early enforcement attention will likely be focused by media reporting, Congressional scrutiny, and civil society tips.

Even U.S. companies not in any of these immediately prioritized enforcement sectors must, however, remain mindful of their supply chain exposure to the XUAR and be prepared to focus compliance program resources on their supply chains. This is especially true as enforcement of the UFLPA expands with the availability of new technologies, additional funding for UFLPA enforcement, and increased collaboration among enforcement agencies, industry groups, and civil society.

1. Enhanced Supply Chain Tracing Technologies

Given the ever-increasing complexity of global supply chains, effective identification of shipments subject to the UFLPA will require sophisticated supply chain tracing technologies. Accordingly, the FLETF enforcement strategy instructs CBP to prioritize a wide range of technological capabilities. These include:

Advanced search engines that would allow CBP to more easily link known forced labor violators with related businesses, including shell companies and layered ownership structures;
Foreign corporate registry data that would allow CBP to map the structures or multinational companies and networks;
Scanning, translation, and data extraction of non-text-searchable documents;
Remote sensors to support digital traceability of raw materials sourced from Xinjiang; and
Enhanced modeling tools and machine leaning.[70]

As CBP acquires and refines these technologies, the agency will be able to expand enforcement of the UFLPA beyond shipments most obviously tied to listed entities and high-priority sectors in the XUAR.

2. Increased Funding for UFLPA Enforcement

Despite its intention to enforce the UFLPA robustly, CBP’s resources are finite. Various funding requests included in the FLETF’s enforcement strategy, however, indicate how the agency may scale its enforcement of the Act in the coming years.

In addition to budget requests related to the tracing technology discussed above, the strategy focuses largely on three areas for increased spending, both at CBP and at DHS: staffing, strategy and coordination, and outreach.[71] Notably, the strategy indicates that CBP has already received funding to create 65 additional positions, as well as funding to cover overtime, to ensure sufficient staffing to enforce the UFLPA.[72] Likewise, funding for strategy efforts will allow DHS to engage with international partners and coordinate other U.S. government initiatives related to Chinese forced labor.[73]

3. Inter-Agency Collaboration and Stakeholder Engagement

Lastly, the FLETF enforcement strategy emphasizes the need for coordination and collaboration with relevant stakeholders in order to effectively enforce the UFLPA. This collaboration will span the private sector, civil society, and other government agencies.

FLETF has indicated an intention to host a number of joint-interagency meetings and working-level meetings with both NGOs and the private sector to discuss UFLPA enforcement on at least a biannual basis.[74] While these meetings may allow industry groups to voice concerns with the UFLPA’s impact on their business, they will also facilitate NGO tips about forced labor in supply chains beyond the UFLPA’s high-priority sectors.

Moreover, increased interagency coordination may lead to the designation of additional entities to the UFLPA Entity List and the identification of additional high-priority enforcement sectors. For example, the Department of Labor regularly produces detailed reports on Goods and Products Produced by Forced or Indentured Child Labor. Although FLETF has focused UFLPA enforcement on apparel, cotton, silica-based products, and tomatoes, these Department of Labor reports already list a number of other products tainted by forced labor in China, such as bricks, electronics, and artificial flowers. Increased communication between the Department of Labor and the FLETF could lead to these additional sectors being designated as high-priority.

IV. Expected PRC Response

The PRC government has long denied any allegations of forced labor in the XUAR and has viewed foreign attempts to address this issue as attacks on Chinese sovereignty.[75] Immediately following the passage of the UFLPA in December 2021, the PRC Ministry of Foreign Affairs reiterated these concerns, characterizing the act as “violat[ing] international law” and “grossly interfer[ing] in China’s internal affairs.”[76] In light of these comments, the PRC government is likely to view U.S. enforcement of the Act as an escalation of this perceived attack on Chinese sovereignty.

Given this strong reaction from Beijing, it is likely that China may implement new countersanctions and increase enforcement of its existing blocking statute, described in detail in our previous alert. By creating significant legal consequences for Chinese persons who comply with prohibited extraterritorial applications of foreign law, enforcement of this blocking statute will have the added effect of making effective diligence in the XUAR even more challenging. U.S. importers may be left unable to gather from their Chinese suppliers the documentation necessary to satisfy the UFLPA’s high evidentiary standard.

Notably, the increased tension between the U.S. and China caused by the UFLPA coincides with the continued economic isolation of Russia. In coming months, we can expect China to continue to be pushed closer toward Russia and the small group of non-aligned countries that have remained neutral with respect to Russia.

Despite the prospect of countersanctions and increased trade between China and Russia, neither the Biden administration nor the U.S. Congress are likely to be sympathetic to Chinese concerns about the UFLPA’s reach. Instead, robust enforcement of the UFLPA can be expected to continue, motivated by bipartisan support for forced labor initiatives and U.S. concerns about China’s position as an economic and strategic competitor. Companies with substantial resources may be able to leverage changes to their supply chains to comply with the UFLPA’s demands. Still, they may consider bifurcated supply chains, with one supply chain leading to the Chinese market and the other destined for the U.S. and other jurisdictions where forced labor initiates are on the rise. Companies with fewer resources, however, may be forced to source their raw materials and other inputs from other jurisdictions.

__________________________

[1] U.S. Customs & Border Prot., Fact Sheet: Uyghur Forced Labor Prevention Act of 2021 (2022), https://www.cbp.gov/sites/default/files/assets/documents/2022-Jun/UFLPA%20Fact%20Sheet_FINAL.pdf.

[2] Uyghur Forced Labor Prevention Act, Pub. L. No. 117-78, § 3(a), (b)(2) (2021).

[3] 19 U.S.C. § 1307.

[4] Pub. L. No. 114-125 § 910 (2016)

[5] United States-Mexico-Canada Agreement art. 23.6, Dec. 10, 2019, Pub. L. 116-113 (2020).

[6] Exec. Order No. 13923, 85 Fed. Reg. 30587 (2020).

[7] Uyghur Human Rights Policy Act, Pub. L. No. 116-145 (2020).

[8] Press Release, CBP Issues Region-Wide Withhold Release Order on Products Made by Slave Labor in Xinjiang, U.S. Customs & Border Prot. (Jan. 13, 2021), https://www.cbp.gov/newsroom/national-media-release/cbp-issues-region-wide-withhold-release-order-products-made-slave?language_content_entity=en.

[9] Press Release, The Department of Homeland Security Issues Withhold Release Order on Silica-Based Products Made by Forced Labor in Xinjiang, U.S. Customs and Border Prot. (Jun. 24, 2021), https://www.cbp.gov/newsroom/national-media-release/department-homeland-security-issues-withhold-release-order-silica?language_content_entity=en.

[10] Uyghur Forced Labor Prevention Act, Pub. L. No. 117-78 (2021).

[11] Ana Swanson, Companies Brace for Impact of New Forced Labor Law, NY Times (Jun. 22, 2022), https://www.nytimes.com/2022/06/22/us/politics/xinjiang-uyghur-forced-labor-law.html?smid=em-share.

[12] Pub. L. No. 117-78 § 3(a) (2021).

[13] Id. § 3(b)(1)(A).

[14] Id. § 3(b)(1)(B).

[15] Id. § 3(b)(2).

[16] Id. § 2(c).

[17] Id. § 2(e).

[18] Notice Seeking Public Comments on Methods To Prevent the Importation of Goods Mined, Produced, or Manufactured With Forced Labor in the People’s Republic of China, 87 Fed. Reg. 3567 (Jan. 24, 2022).

[19] FLETF Public Hearing on the Uyghur Forced Labor Prevention Act, Regulations.gov, https://www.regulations.gov/document/DHS-2022-0001-0192 (last visited June 10, 2022).

[20] Report to Congress, Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China at 8, U.S. Dep’t of Homeland Sec. (Jun. 17, 2022), https://www.dhs.gov/sites/default/files/2022-06/22_0617_fletf_uflpa-strategy.pdf (hereinafter “FLETF Enforcement Strategy”).

[21] Id.

[22] Uyghur Forced Labor Prevention Act: Operational Guidance for Importers, U.S. Customs & Border Prot. (Jun. 13, 2022), https://www.cbp.gov/sites/default/files/assets/documents/2022-Jun/CBP_Guidance_for_Importers_for_UFLPA_13_June_2022.pdf (hereinafter “CBP Operational Guidance for Importers”).

[23] Pub. L. 117-78 § 3(a) (2021).

[24] Id. at § 2(d)(2)(B).

[25] Xinjiang Supply Chain Business Advisory (Jul. 2, 2020, updated Jul. 13, 2021), U.S. Department of the Treasury, https://home.treasury.gov/system/files/126/20210713_xinjiang_advisory_0.pdf (joint advisory by Departments of Treasury, State, Commerce, Labor, and Homeland Security and the Office of the U.S. Trade Representative).

[26] FLETF Enforcement Strategy at 19.

[27] Id. at 18.

[28] UFLPA Entity List, U.S. Dep’t of Homeland Sec., https://www.dhs.gov/uflpa-entity-list (last visited Jun. 22, 2022).

[29] FLETF Enforcement Strategy at 22.

[30] Kelly Pickerel, Solar industry prepares for Uyghur Forced Labor Prevention Act implementation, Solar Power World (Jun. 20, 2022), https://www.solarpowerworldonline.com/2022/06/solar-industry-prepares-for-uyghur-forced-labor-prevention-act-implementation/.

[31] Pub. L. 117-78 § 2(d)(2)(B)(viii) (2021).

[32] Jane Luxton, Imports From China: The Clock Is Ticking On Implementation Of Uyghur Forced Labor Prevention Act, Lewis Brisbois (June 9, 2022), https://lewisbrisbois.com/newsroom/legal-alerts/imports-from-china-the-clock-is-ticking-on-implementation-of-uyghur-forced-labor-prevention-act?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration.

[33] Swanson, supra note 11.

[34] See, Solar Supply Chain Traceability Protocol, Solar Energy Industries Assoc., https://www.seia.org/research-resources/solar-supply-chain-traceability-protocol (last visited Jun. 22, 2022).

[35] Comply Chain, U.S. Dep’t of Labor, https://www.dol.gov/ilab/complychain/ (last visited Jun. 22, 2022)

[36] FLETF Enforcement Strategy at 42, 44.

[37] Id. at 44.

[38] United States Council for International Business Comment to the Forced Labor Enforcement Task Force, Regulations.gov, 29 (Mar. 10, 2022), https://downloads.regulations.gov/DHS-2022-0001-0137/attachment_1.pdf.

[39] FLETF Enforcement Strategy at 45.

[40] Id. at 46.

[41] Id.

[42] Angela M. Santos et al., Uyghur Forced Labor Prevention Act Is Coming… Are You Ready?: CBP Issues Hints at the Wave of Enforcement To Come, NAT. L. REV. (June 2, 2022), https://www.natlawreview.com/article/uyghur-forced-labor-prevention-act-coming-are-you-ready-cbp-issues-hints-wave.

[43] Webinar with CBP staff (June 7, 2022). TJ Kendrick noted that “there is not much difference [between CAATSA and UFLPA] except we have a UFLPA strategy,” Joanne Colonnello referred to “several [CBP] rulings” regarding clear and convincing evidence (including on CAATSA) and Elva Muneton confirmed Kendrick and Colonnello’s observations.

[44] Countering America’s Adversaries Through Sanctions Act FAQs, DHS, February 11, 2021 (accessed: https://www.dhs.gov/news/2021/02/11/countering-america-s-adversaries-through-sanctions-act-faqs). Find CAATSA § 302A at 22 U.S.C. § 9241(a) and find a side-by-side comparison of the relevant sections of CAATSA and UFLPA in the Appendix.

[45] Id. See also, Poof Apparel Application for Further Review, HQ H317249, Protest No. 4601-21-125334 (Mar. 5, 2021), available at https://rulings.cbp.gov/ruling/H317249).

[46] Colorado v. New Mexico, 467 U.S. 310, 316 (1984) (finding in an equitable apportionment case that Colorado failed to meet the “clear and convincing” standard). Cited in Poof Apparel Application for Further Review, HQ H317249, Protest No. 4601-21-125334 (Mar. 5, 2021), available at https://rulings.cbp.gov/ruling/H317249).

[47] Luxton, supra note 32.

[48] Webinar with CBP staff (June 7, 2022).

[49] Alexandra Stevenson & Sapna Maheshwari, ‘Escalation of Secrecy’: Global Brands Seek Clarity on Xinjiang, New York Times (May 29, 2022), https://www.nytimes.com/2022/05/27/business/cotton-xinjiang-forced-labor-retailers.html.

[50] Webinar with CBP staff (June 7, 2022).

[51] See, e.g., 545231, Application for Further Review of Protest 1303-92-100212, U.S. Customs & Border Prot. (Nov. 5, 1993), https://rulings.cbp.gov/ruling/545231.

[52] Id.

[53] Santos et al., supra note 42. Furthermore, future actions taken under the current XUAR WROs will follow the UFLPA timeline. Webinar with CBP staff (June 7, 2022).

[54] 19 C.F.R. § 151.16(b) (2022).

[55] Santos et al., supra note 42.

[56] 19 C.F.R § 151.16(e) (2022).

[57] CBP Operational Guidance for Importers at 10.

[58] Id. at 9–10.

[59] 19 C.F.R. § 174.12(e) (2022).

[60] Id. § 151.16(g).

[61] Santos et al., supra note 42.

[62] See 19 U.S.C. § 1595a; 19 C.F.R. Part 171

[63] Webinar with CBP staff (June 7, 2022). Joanne Colonnello cited as an example of obvious fraud a shipment from Malaysia where, upon opening the box, CBP could see a label stating “made with Xinjiang cotton.”

[64] FLETF Enforcement Strategy at 49.

[65] Id. § 3(b)(1)(A).

[66] Id. § 3(b)(1)(B).

[67] Id. § 3(b)(2).

[68] FLETF Enforcement Strategy at V.

[69] CBP Operational Guidance for Importers at 8.

[70] FLETF Enforcement Strategy at 31.

[71] Id. at 35–39.

[72] Id. at 37.

[73] Id. at 36.

[74] Id. at 53.

[75] China tells U.N. rights chief to respect its sovereignty after Xinjiang comments, Reuters (Sep. 11, 2018), https://www.reuters.com/article/us-un-rights-china/china-tells-u-n-rights-chief-to-respect-its-sovereignty-after-xinjiang-comments-idUSKCN1LR0L0.

[76] Press Release, Foreign Ministry Spokesperson’s Statement on US’ Signing of the So-called Uyghur Forced Labor Prevention Act, Ministry of Foreign Affairs of the PRC (Jan. 24, 2021), https://www.fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/2535_665405/202112/t20211224_10475191.html.

The following Gibson Dunn lawyers assisted in preparing this client update: Sean Brennan, Christopher Timura, Judith Alison Lee, Adam M. Smith, Fang Xue, and Perlette Jura.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade or Environmental, Social & Governance (ESG) practice groups:

International Trade Group:

United States
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
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Happy New Year of the Tiger to our clients and friends!

2021 was the year where the PRC Government launched a broad regulatory assault on Chinese “Big Tech” companies. The State Administration for Market Regulation (“SAMR”) did its part by imposing significant fines on Alibaba and Meituan for abuses of dominance, and administrative penalties in more than 100 cases for failure to notify, over 80 of which involved platform companies, such as Alibaba, Baidu, Didi, Meituan, Suning, and JD.com. The Government also released the Anti-Monopoly Guidelines for the Platform Economy Sector in February 2021 to provide guidance on enforcement in the tech space.

On the merger front, SAMR reviewed approximately 700 transactions, imposed remedies on four of them, and, more significantly, blocked one transaction – this is only the third time that China’s antitrust authority has ever done so.

2022 should see a continued increase in antitrust enforcement. In this respect, SAMR’s Anti-Monopoly Bureau has been elevated in the Chinese bureaucracy, which signals its importance to the Government.

The Government also published its Draft Amendment to the Anti-Monopoly Law (“AML”) for public comment in October 2021 and the proposed changes could be adopted in 2022.

1. Legislative / Regulatory Developments

Anti-Monopoly Guidelines for the Platform Economy Sector (“Platform Guidelines”). In February 2021, SAMR issued specific guidance on the applicability of the AML to digital platforms, including e-commerce and social media companies. The Platform Guidelines confirm that transactions involving variable interest entities (“VIE”) are subject to merger review, and grant SAMR broad discretion to investigate transactions involving digital platforms. They also set out the types of agreements that may constitute monopoly agreements in the platform economy context, some of which go beyond the traditional written or verbal agreements or meeting of minds. For example, under the Platform Guidelines, the use of technical methods, data, and algorithms may constitute a horizontal or vertical monopoly agreement, and a most favoured nation (“MFN”) clause may constitute a vertical monopoly agreement. In addition, the Platform Guidelines provide that an undertaking’s ability to control and process data will be taken into account by SAMR when reviewing abuse of dominance cases, both in assessing market dominance and in analysing conduct (e.g. an undertaking penalizing uncooperative operators with traffic restrictions or search downgrades).

For more detail on the Platform Guidelines, please refer to our client alert, Antitrust in China – 2020 Year in Review, published on March 4, 2021.

Draft Amendment to the Anti-Monopoly Law (“Draft Amendments to the AML”). After over a decade, China has taken a major step towards introducing critical changes to the AML, which came into force in 2008. Following SAMR’s publication of the first draft of the amendments to the AML in early 2020, the Standing Committee of the National People’s Congress (“NPCSC”) released its Draft Amendments to the AML for public consultation on October 23, 2021. The public consultation period closed on November 21, 2021.

The Draft Amendments to the AML propose changes that affect all aspects of the AML, including merger control, non-merger enforcement, and procedural rules. In particular, they impose significantly harsher penalties on undertakings for failure to file, and introduce fines against individuals for engaging in anticompetitive behaviour.

Moreover, the Draft Amendments to the AML propose new provisions targeting platform companies, specifically noting that (1) undertakings “shall not exclude or restrict competition by abusing the advantages in data and algorithms, technology and capital and platform rules,” and that (2) it would be considered an abuse of dominance if an undertaking with a dominant market position “uses data, algorithms, technologies and rules of the platform to erect obstacles and impose unreasonable restrictions on other undertakings.” The new provisions signal the continued focus of China’s antitrust enforcement on the platform economy.

Other notable proposed amendments include the introduction of the “stop-the-clock” mechanism (thus giving SAMR greater flexibility to extend the merger review process), abandoning the per se treatment of resale price maintenance (though the burden of proof lies with undertakings), providing a safe harbour for monopoly agreements, and expressly imposing liability on cartel facilitators.

In terms of next steps, the NPCSC will review the feedback received and further deliberate on the amendments before signing them into law. While there is no official announcement on the timing, it is expected that the NPCSC would finalize and pass the amendments in 2022.

For more detail on the Draft Amendments to the AML, please refer to our client alert, China Publishes Draft Amendment to the Anti-Monopoly Law, published on October 27, 2021.

Elevation of Status of Anti-Monopoly Bureau. In November 2021, the Anti-Monopoly Bureau, which was a subdivision under SAMR, was promoted to the deputy ministerial level. While the Bureau remains subject to SAMR supervision, this elevated status ensures that it will benefit from increased manpower and budget and demonstrates the Chinese government’s commitment to further strengthening antitrust enforcement.

Under the revamped organization, the deputy ministerial-level agency contains three divisions that focus on (1) policy implementation, (2) merger control and investigation of gun-jumping, and (3) supervision of monopoly agreements and abuse of market dominance. Most notably, in the latter two divisions, there is a subdivision that specifically targets the platform economy, further underscoring China’s determination to closely scrutinize potential anticompetitive behaviour in the technology sector.

2. Merger Control

In 2021, SAMR unconditionally approved more than 99% of approximately the 700 deals it reviewed and imposed conditions in only four transactions. However, it blocked one transaction—the proposed merger between HUYA Inc. (“Huya”) and DouYu International Holdings Limited (“DouYu”). This is only the third time that a Chinese antitrust authority has blocked a merger since the inception of China’s merger control regime in 2008.

Like in 2020, SAMR took on average 14-15 days to complete its review of cases under the simplified procedure. It took an average of 288 days to complete its review of conditionally approved cases, and 187 days to complete its review of the single blocked transaction.

Separately, SAMR announced that they penalized parties in almost 100 transactions for failure to notify. This represents a nearly sevenfold increase in the number of failure to notify cases compared with 2020.

2.1 Prohibition Decision

In July 2021, SAMR prohibited the proposed merger between Huya, a company controlled by Tencent, and DouYu, in which SAMR found Tencent exercised joint control with DouYu’s founder team. Both companies provide videogame live-streaming services. According to SAMR, the proposed merger effectively gave Tencent sole control over DouYu.

In its review, SAMR found that the proposed merger would result in the merged entity having a market share of over 70% by turnover, 80% by number of active users, and 60% by number of live streamers. Given the significant post-merger market shares and that the videogame live-streaming market has high entry barriers, SAMR concluded that the proposed merger would strengthen Tencent’s dominant position and restrict or eliminate competition in the videogame live-streaming market.

SAMR’s review also found that post-merger, Tencent would have the ability and incentive to implement a two-way vertical foreclosure in both the upstream online-game operator market and the downstream videogame live-streaming market, given Tencent’s existing market share of over 40% in the upstream market and the merged entity’s significant market share in the downstream market noted above. Specifically, SAMR contended that:

Tencent, as an online-game operation service provider, owns online-game copyright licenses that are critical for the downstream videogame live-streaming market. Post-merger, Tencent would have the ability and incentive to foreclose downstream competitors by, for example, precluding their access to copyright licenses, thereby restricting or eliminating competition in the downstream videogame live-streaming market.
As videogame live-streaming is an effective channel to promote videogames of upstream online-game operation service providers, Tencent would have the ability and incentive to preclude upstream competitors from having the live-streaming channels promote their games, thereby restricting or eliminating competition in the upstream online-game operation service provider market.

2.2 Conditional Approval Decisions

Cisco Systems Inc. (“Cisco”) / Acacia Communications Inc. (“Acacia”). In January 2021, SAMR imposed behavioural conditions on Cisco’s proposed acquisition of Acacia. SAMR found competition concerns resulting from the vertical relationship between the parties, namely Acacia being in the upstream global market for coherent digital signal processors (“DSP”) and Cisco being in the downstream Chinese market for optical transmission systems. To remedy these concerns, the parties offered a number of commitments, to which SAMR agreed, including the following: (1) to continue performing all existing contracts; (2) to continue supplying coherent DSP to Chinese customers on fair, reasonable and non-discriminatory (“FRAND”) terms; and (3) not to bundle, tie, or impose unreasonable conditions in the supply of coherent DSP.

Danfoss A/S / Eaton Corporation. In June 2021, SAMR imposed structural conditions on Danfoss’s acquisition of Eaton’s hydraulic business. SAMR concluded that the proposed transaction would increase the concentration in China’s orbital motor market given that, among other considerations, (1) the parties are the two largest players in the market with a combined market share of 50% to 55%, such that the combined entity would have a dominant position in the market; (2) the parties are each other’s closest competitor and the proposed transaction would remove competitive restraints; and (3) the proposed transaction would raise market entry barriers given the parties’ existing advantages (e.g. reputation). To resolve these competition concerns, Danfoss agreed to divest its orbital motor business in China.

Illinois Tool Works Inc. (“ITW”) / MTS Systems Corporation (“MTS”). In November 2021, SAMR imposed behavioural conditions on ITW’s proposed acquisition of MTS. The proposed transaction would result in ITW obtaining sole control over MTS. SAMR identified competition concerns in the high-end electrohydraulic servo material testing equipment market, as the parties have a combined market share of 65% to 70%. SAMR imposed a range of behavioural remedies on the parties, including (1) to continue performing all existing contracts with Chinese customers and maintaining the same level of service quality for them; and (2) to maintain prices for the relevant testing products in China no higher than their average price within the past 24 months.

SK Hynix Inc. (“SK Hynix”) / Intel Corporation (“Intel”). In December 2021, SAMR imposed behavioural conditions on SK Hynix’s acquisition of Intel’s NAND memory chip business. In its review, SAMR defined the relevant markets as the worldwide and China markets of (1) peripheral component interconnect express (“PCIe”) enterprise-class solid-state disk (“SSD”); and (2) serial advanced technology attachment (“SATA”) enterprise-class SSD. It concluded that the proposed transaction would give rise to competition concerns given the higher degree of market concentration post-acquisition (over 30% globally and over 50% in China), a decrease in the number of major players in the relevant markets post-acquisition (from three to two in the PCIe enterprise-class SSD market and from four to three in the SATA enterprise-class SSD market), and high barriers to entry.

To resolve these concerns, SAMR imposed a number of behavioural conditions on the combined entity, including the following: (1) to continue expanding the quantity of production of the two types of SSDs in the next five years; (2) to maintain prices for the relevant products at or below their average price over the past 24 months; (3) to continue supplying all products in China on FRAND terms; (4) to refrain from exclusive dealing, bundling, or tying when supplying products in China; (5) to refrain from entering into any agreement, or engage in any concerted act, with major competitors in China on price, output, or sales volume; and (6) to assist a third-party competitor to enter the two markets.

2.3 Enforcement Against Non-Notified Transactions

In 2021, SAMR issued a fine for failure to notify in almost 100 cases, 84 of which involved platform companies. Approximately 90% of all cases received the maximum fine of RMB 500,000 (~USD 78,642), while the remaining cases received a fine of at least RMB 150,000 (~USD 23,593). SAMR also imposed remedies in one failure to file case.

3. Non-Merger Enforcement

As they have done in recent years, SAMR and its local bureaus continued to target the pharmaceutical sector in a wide range of enforcement actions, including abuse of a dominant position, resale price maintenance, price fixing, and market allocation. SAMR’s enforcement against pharmaceutical companies in 2021 remained focused on Chinese Active Pharmaceutical Ingredients (“API”) manufacturers, such as the imposition of a RMB 100.7 million (~USD 15.8 million) fine on the country’s leading supplier of batroxobin API, the Hong Kong-listed Simcere Pharmaceutical, for abuse of a dominant position in China’s batroxobin API market through refusal to supply.

Moreover, there were a series of enforcement actions targeting platform companies in 2021, once again demonstrating SAMR’s close regulatory scrutiny of the platform economy sector. Two of the cases stood out in particular due to the scale of the business and the significant amount of fine:

In April 2021, SAMR imposed a fine of RMB 18.228 billion (~USD 2.87 billion) on Alibaba for abuse of a dominant position. The fine amounted to 4% of Alibaba’s annual sales in China in 2019. SAMR’s investigation concluded that Alibaba prohibited merchants from operating stores or participating in promotional activities on Alibaba’s rival platforms, and implemented a reward and penalty mechanism on the merchants’ compliance (e.g. by downgrading online ratings of merchants who refused to comply).
In October 2021, SAMR imposed a fine of RMB 3.44 billion (~USD 541 million) on China’s food delivery giant, Meituan, for abusing its dominant position. This amounted to 3% of Meituan’s 2020 turnover in China. SAMR found that Meituan punished merchants who refused to comply with Meituan’s exclusivity agreements by charging these merchants high commission rates and granting them less exposure on Meituan’s platform.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Bonnie Tong (+852 2214 3762, btong@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On December 23, 2021, President Biden signed the Uyghur Forced Labor Prevention Act (the “UFLPA” or “Act”) into law.[1] The UFLPA, which received widespread bipartisan support in Congress, is the latest in a line of U.S. efforts to address the plight of Uyghurs and other persecuted minority groups in China’s Xinjiang Uyghur Autonomous Region (the “XUAR”).

A key feature of the Act is the creation of a rebuttable presumption that all goods manufactured even partially in the XUAR are the product of forced labor and therefore not entitled to entry at U.S. ports. The Act also builds on prior legislation, such as 2020’s Uyghur Human Rights Policy Act,[2] by expanding that Act’s authorization of sanctions to cover foreign individuals responsible for human rights abuses related to forced labor.

I. Background

In recent years, both the executive and legislative branches have demonstrated an increased interest in “lead[ing] the international community in ending forced labor practices wherever such practices occur,”[3] with a particular focus on the XUAR.

2020 saw a boom in efforts across agencies and the houses of Congress, beginning with the Department of Homeland Security’s January publication of a Department-wide strategy to combat forced labor in supply chains.[4] Later that year, DHS joined the U.S. Departments of State, Treasury and Commerce to issue a joint advisory warning of heightened risks of forced labor for businesses with supply chain exposure to the XUAR.[5]

The U.S. also emphasized eliminating forced labor in supply chains through its international obligations at this time. The 2020 United States-Mexico-Canada Agreement (“USMCA”) required each party to this free trade agreement to “prohibit the importation of goods into its territory from other sources produced in whole or in part by forced or compulsory labor.”[6] To carry out this obligation, President Trump issued an executive order in May 2020 establishing the Forced Labor Enforcement Task Force (“FLETF”), chaired by the Secretary of Homeland Security and including representatives from the Departments of State, Treasury, Justice, Labor, and the Office of the U.S. Trade Representative.[7] The implementing bill of the USMCA requires the FLETF to serve as the central hub for the U.S. government’s enforcement of the prohibition on imports made through forced labor.[8]

In Congress, Rep. James McGovern (D) and Sen. Marco Rubio (R) — co-chairs of the Congressional-Executive Commission on China — introduced the first versions of the UFLPA in the House of Representatives[9] and the Senate[10] in March 2020. The bill received unusual, wide bipartisan support, with co-sponsors among Congress’s most conservative and most liberal members.[11] Each bill passed in its respective house in early 2021, and a compromise bill — reconciling differences of timing and reporting processes between the two versions — was sent to the President in mid-December[12] before being signed into law.

II. Presumptive Ban on Imports from the XUAR

The UFLPA’s trade provisions are notable both for their expansive scope and the heightened evidentiary standard required to rebut the Act’s presumptive prohibition on all imports from the XUAR.

a. Scope of the Import Ban

The UFLPA’s scope is broad, instructing U.S. Customs and Border Protection (“CBP”) to presume that “any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in” the XUAR were made with forced labor and are therefore unfit for entry at any U.S. ports.[13]

This presumption extends also to goods, wares, articles, and merchandise produced by a variety of entities identified by the FLETF in its strategy to implement the Act. This includes entities that work with the XUAR government to recruit, transport, or receive forced labor from the XUAR,[14] as well as entities that participate in “poverty alleviation” and “pairing-assistance” programs[15] in the XUAR.[16]

CBP has traditionally had the authority to prevent the importation of “[a]ll goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by . . . forced labor” through the issuance of Withhold Release Orders (“WROs”).[17] The UFLPA broadens this power by creating a rebuttable presumption that all articles produced in whole or in part in the XUAR or by entities that source material from persons involved in XUAR government forced labor schemes are automatically barred from entry into the United States, even absent a WRO or any specific showing of forced labor in the supply chain.

b. Exceptions to the Import Ban

Despite this broad prohibition, importers of goods covered by the UFLPA may still be able to rebut the presumption against importation. The Act specifies that the presumption will not be applied if the Commissioner of CBP determines that:

The importer of record has:
- Fully complied with all due diligence and evidentiary guidance established by the FLETF pursuant to the Act, along with any associated implementing regulations; and
- Completely and substantively responded to all CBP inquiries seeking to ascertain whether the goods were produced with forced labor; and
“Clear and convincing” evidence shows that the goods were not produced wholly or in part with forced labor.[18]

Each time the Commissioner determines that an exception to the import ban is warranted under the criteria above, the Commissioner must submit a report to Congress within 30 days, identifying the goods subject to the exception and the evidence upon which the determination is based.[19] The Commissioner must make all such reports available to the public.[20]

III. High-Priority Enforcement Sectors

As part of its enforcement strategy, the UFLPA instructs the Forced Labor Enforcement Task Force to prepare both a list of high-priority sectors subject to CBP enforcement, and a sector-specific enforcement plan for each of these high-priority sectors.[21] The Act mandates that cotton, tomatoes, and polysilicon must be among the high-priority sectors, building upon CBP’s existing WRO against all cotton and tomato products produced in the XUAR.[22]

The addition of polysilicon on this list of high-priority sectors directly impacts the U.S. solar energy industry: nearly half of the world’s polysilicon — a key material for the manufacture of solar panels — is produced in the XUAR.[23] Despite the dominance of Chinese polysilicon, however, solar industry groups have embraced the passage of the UFLPA and are encouraging solar companies to move their supply chains out of the XUAR.[24] Corporate responsibility concerns surrounding the sourcing of polysilicon from the XUAR have been circulating for at least a year, and the solar industry groups have acted proactively to create standards and procedures to trace and audit supply chains of this important resource. To further this industry-wide goal of eradicating forced labor from solar supply chains,[25] these industry groups recently published a “Solar Supply Chain Traceability Protocol.”[26]

IV. Sanctions

The UFLPA also amends the Uyghur Human Rights Policy Act of 2020 to underscore that sanctions may be imposed due to “[s]erious human rights abuses in connection with forced labor” related to the XUAR. Within 180 days of enactment, the President is required to submit an initial report to Congress identifying non-U.S. persons subject to sanctions under this new provision.[27] The sanctioned individuals will be subject to asset blocking, as provided under the International Emergency Economic Powers Act,[28] as well as the revocation or denial of visas to enter the United States. The President must submit additional reports at least annually identifying non-U.S. persons responsible for human rights violations in the XUAR, including with respect to forced labor, as provided under the Uyghur Human Rights Policy Act.[29]

V. Compliance Takeaways

a. Establishing “Clear and Convincing” Evidence

The Act does not specify what types of evidence might suffice to establish by clear and convincing evidence that goods are not the product of forced labor. Instead, the Act charges the FLETF with publishing an enforcement strategy containing, among other things, “[g]uidance to importers with respect to . . . the type, nature, and extent of evidence that demonstrates that goods originating in the People’s Republic of China . . . were not mined, produced, or manufactured wholly or in part with forced labor.”[30]

While the Act does not clarify what evidence would be necessary to meet the “clear and convincing” standard, CBP has issued guidance regarding the detailed evidence importers may need to provide to obtain the release of goods detained pursuant to certain WROs. A similar high bar of documentation — if not higher — will likely be required under the UFLPA. In addition to the required Certificate of Origin and importer’s detailed statement,[31] CBP has highlighted the following forms of evidence as helpful to importers seeking the release of shipments detained pursuant to a WRO:

An affidavit from the provider of the product;
Purchase orders, invoices, and proof of payment;
A list of production steps and records for the imported merchandise;
Transportation documents;
Daily manufacturing process reports;
Evidence regarding the importer’s anti-forced labor compliance program; and
Any other relevant information that the importer believes may show that the shipments are not subject to the import ban.[32]

The exact contours of any guidance to be issued by the Forced Labor Enforcement Task Force remains uncertain. However, companies with supply chain exposure to the XUAR should expect compliance with the UFLPA to require significant supply chain diligence and documentation obligations. These obligations may exceed the already high benchmarks on diligence established by the FLETF and CBP through years of sustained engagement with non-governmental organizations and other standard-setting stakeholders who are focused on eradicating forced labor from supply chains globally.

b. Due Diligence

The Act instructs the FLETF to issue guidance on “due diligence, effective supply chain tracing, and supply chain management measures” aimed at avoiding the importation of goods produced with forced labor in the XUAR within 180 days of the UFLPA’s enactment.[33]

Until the FLETF issues this guidance, companies importing goods into the U.S. should look to recognized international standards to conduct due diligence of their supply chains to identify potential ties to the XUAR. For example, the “Xinjiang Supply Chain Business Advisory” identifies the following standards as providing useful guidance on best practices for this due diligence:[34] the UN Guiding Principles on Business and Human Rights,[35] the OECD Guidelines on Multinational Enterprises,[36] and the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.[37] The Advisory warns, however, that third-party audits alone cannot guarantee credible information for due diligence purposes, both because of official harassment of auditors and because of workers’ fear of reprisals for speaking to these auditors.[38] To combat this information gap, the Advisory encourages businesses to collaborate within industry groups to share information and build relationships with Chinese suppliers.[39]

The unique circumstances of the forced labor crisis in the XUAR may render due diligence efforts insufficient, however. In 2020, the Congressional-Executive Commission on China warned that “due diligence in Xinjiang is not possible” because of official repression and harsh reprisals against whistle blowers, which is made possible by extensive state surveillance in the XUAR.[40] (Notably, this warning coincided with the introduction of the first versions of the bills that would later become the UFLPA.) Moreover, China enacted a series of “blocking statutes” in 2021 authorizing, inter alia, countersanctions and civil liability for Chinese nationals who comply with attempts to enforce foreign laws extraterritorially in China.[41] This threat of liability, coupled with the already-existing reprisals, limits the ability of companies to obtain reliable information about their supply chain activity in the XUAR.

VI. Timeline for Enforcement

The Act’s rebuttable presumption against the importation of goods produced in the XUAR or by entities identified by the FLETF is set to take effect 180 days after the UFLPA’s enactment, on June 21, 2022.

The Act provides that the process for developing the enforcement strategy will proceed as follows:

Within 30 days of enactment (by Jan. 22, 2022): The FLETF will publish a notice soliciting public comment on how best to ensure that goods mined or produced with forced labor in China — and particularly in the XUAR — are not imported into the United States.[42]
No less than 45 days after notice is given (by Mar. 8, 2022): The public, including private sector businesses and non-governmental organizations, will submit comments in response to the FLETF’s notice.[43]
Within 45 days of the public comment period closing (by Apr. 22, 2022): The FLETF will hold a public hearing, inviting witnesses to testify regarding measures that can be taken to trace supply chains for goods mined or produced in whole or in part with forced labor in China and to ensure that goods made with forced labor do not enter the United States.[44]
No later than 180 days after enactment (June 21, 2022): The FLETF, in consultation with the Secretary of Commerce and the Director of National Intelligence, must submit to Congress a strategy for supporting CBP’s processes for enforcing the Act. This strategy must include guidance to importers regarding due diligence and supply chain tracing, as well as the nature and extent of evidence required to show that goods originating in China were not mined or produced with forced labor.The Forced Labor Enforcement Task Force must thereafter submit an updated strategy to Congress annually.[45]

Notably, the FLETF’s enforcement strategy need only be submitted by the day the Act’s rebuttable presumption takes effect. Therefore, importers may have little or no advance notice as to what evidence they must submit to rebut the presumption against importation.

VII. Global Efforts to Address Forced Labor in the XUAR

The U.S. is far from the only country targeting forced labor through new executive and legislative actions. In the past year, jurisdictions around the globe have developed a variety of new strategies for eliminating the importation of goods produced with forced labor in the XUAR. These global efforts vary in scope, and many have not yet taken effect. Companies with supply chain exposure to the XUAR should, however, prepare for an increasingly complex international regulatory landscape in coming years.

a. The European Union (“EU”)

On September 15, 2021, the European Commission (“EC”) President Ursula von der Leyen announced plans for a ban on products made by forced labor to be proposed in 2022.[46] While the XUAR was not named, the proposed measure has been viewed to directly target forced labor in this region.[47] Recent reports, however, have highlighted disagreements within the EC as to which department is to spearhead the proposal due to trade sensitivities.[48] Therefore, little progress has been made. Most recently, in December 2021, the EU Executive Vice-President for Trade, Valdis Dombrovskis, warned the EC of the risks of a ban targeting only forced labor in the XUAR being deemed as “discriminatory”. He further noted that the UFLPA “cannot be automatically replicated in the EU,”[49] and argued instead that including the ban within the EU’s proposed Sustainable Corporate Governance Directive (“SCG Directive”) would be more effective.[50]

The EU has sought to address forced labor more generally via its proposal — in the form of the SCG Directive — for EU-based companies to undertake mandatory human rights due diligence to increase their accountability for human rights and environmental abuses in their supply chains. After lengthy delays, the EC’s proposal for the SCG Directive is now due in early 2022.[51]

At the moment, it remains unclear whether the EU will follow the U.S. in imposing a stand-alone ban on imports from the XUAR, or whether the proposed measures will be weakened by incorporating them into the SCG Directive proposal.

b. United Kingdom

The U.K. does not currently have legislation equivalent to the UFLPA. However, officials within the Foreign Office and the Department for International Trade have suggested that similar efforts to address imports made with forced labor in the XUAR may be imminent.[52] These efforts would build on the U.K.’s ongoing “review of export controls as they apply to Xinjiang . . . to prevent the exports of goods that may contribute to human rights abuses in the region.”[53]

c. Canada

In coordination with the United Kingdom and other international partners, the Canadian government released a statement in January 2021 addressing its concerns with the situation in the XUAR. The government announced that it would adopt a number of measures to combat the alleged human rights violations in the XUAR, including:[54]

Prohibition on Imports of Goods Produced by Forced Labor: On November 24, 2021, Sen. Housakos introduced Bill S-204, an act to amend the “Customs Tariff (goods from Xinjiang).”[55] Currently at the second reading stage in the Canadian Senate, this bill is intended to prevent the importation of goods believed to be produced through forced labor.[56] Consistent with Canada’s obligations under the USMCA, this prohibition would prevent the importation of goods believed to be produced using forced labor in the XUAR.
Xinjiang Integrity Declaration for Canadian Companies: Following the amendments made to the Customs Tariff, the Canadian Government established an Integrity Declaration on Doing Business with Xinjiang Entities to guide Canadian companies’ business practices in the region. The Integrity Declaration is mandatory for all Canadian companies that (i) source goods, directly or indirectly, from the XUAR or from entities that rely on Uyghur, (ii) are established in the XUAR, or (iii) seek to engage in the XUAR market. If any such company fails to sign the Integrity Declaration, they will be ineligible to receive support from the Trade Commissioner Service.[57]
Export Controls: The Canadian government stated that it will deny export licenses for the exportation of goods or technologies if it determines that there is a substantial risk that the export would result in a serious violation of human rights under the Export and Import Permits Act 1985.[58]

d. Australia

In June 2021, Sen. Patrick introduced the Customs Amendment (Banning Goods Produced by Forced Labour) Bill 2021 to the Australian Senate. The introduction of this bill follows the growing concerns in Australia that the Australian Modern Slavery Act 2018 does not adequately address the issue of state-sanctioned forced labor. Rather limited in its scope, the Modern Slavery Act 2018 requires certain companies to submit annual statements reporting on the risks of modern slavery in their operations and supply chains, as well as any steps they are taking to address such risks. Other entities based or operating in Australia may report this information voluntarily.[59]

Sen. Patrick’s bill would go a step further in combatting state-sanctioned forced labor by amending the Customs Act 1901 to prohibit the importation into Australia of goods that are produced in whole or in part by forced labor.[60] Although the bill makes no specific reference to China, human rights abuses in the XUAR were repeatedly cited as the proposal’s impetus during the Senate debate. Moreover, if passed, the bill would have the effect of banning the importation of goods made with Uyghur forced labor.[61] The bill was passed through the Australian Senate with cross-party support and the endorsement of the Australian Council of Trade Unions. The bill must now pass the House of Representatives to become law.[62]

e. New Zealand

New Zealand has taken a notably softer stance than the U.S. Although New Zealand’s parliament unanimously declared in May 2021 that severe human rights abuses against the Uyghur ethnic minority group were taking place in the XUAR, the motion merely expressed the parliament’s ‘grave concern’[63] over these human rights abuses. The Uyghur community in New Zealand have requested for parliament to take stronger action, such as declaring the oppression of Uyghurs in China a ‘genocide’ and placing a ban on the importation of products made by forced labor in the XUAR.[64]

_________________________

[1] Pub. L. 117-78 (2021).

[2] Pub. L. 116-145 (2020).

[3] Pub. L. 117-78, § 1(2) (2021).

[4] Department of Homeland Security Strategy to Combat Human Trafficking, the Importation of Goods Produced with Forced Labor, and Child Sexual Exploitation (Jan. 2020), U.S. DEPARTMENT OF HOMELAND SECURITY, https://www.dhs.gov/sites/default/files/publications/20_0115_plcy_human-trafficking-forced-labor-child-exploit-strategy.pdf.

[5] Xinjiang Supply Chain Business Advisory (Jul. 2, 2020, updated Jul. 13, 2021), U.S. Department of the Treasury, https://home.treasury.gov/system/files/126/20210713_xinjiang_advisory_0.pdf.

[6] United States-Mexico-Canada Agreement art. 23.6, Jul. 1, 2020, available at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement.

[7] Exec. Order No. 13923, 85 Fed. Reg. 30587 (2020).

[8] 19 U.S.C. § 4681 (2020).

[9] Uyghur Forced Labor Prevention Act, H.R. 6210, 116th Cong. (2019–2020).

[10] Uyghur Forced Labor Prevention Act, S. 3471, 116th Cong. (2019–2020).

[11] Id. (House bill’s co-sponsors included Dan Crenshaw, Rashida Tlaib, and Ilhan Omar.). Uyghur Forced Labor Prevention Act, S. 3471, 116th Cong. (2019–2020). (Senate bill’s co-sponsors included Tom Cotton, Marsha Blackburn, Dick Durbin, and Elizabeth Warren.).

[12] Zachary Basu, House unanimously passes Uyghur forced labor bill, Axios (Dec. 15, 2021), https://www.axios.com/congress-uyghur-forced-labor-bill-d4699c95-16ea-4b42-bda4-eb5baa29326a.html.

[13] Pub. L. 117-78 § 3(a) (2021).

[14] Id. at § 2(d)(2)(B)(ii).

[15] The PRC government has established large-scale “mutual pairing assistance” programs, wherein companies from other provinces of China are incentivized to open satellite factories in the XUAR. See Xinjiang Supply Chain Business Advisory, supra note 5 at 6. The State Department has raised concerns that pairing-assistance programs and other poverty alleviation measures have served as a cover for forced labor and the transfer of Uyghurs and other persecuted minorities to other parts of the country. Forced Labor in China’s Xinjiang Region: Fact Sheet, U.S. Department of State (Jul. 1, 2020), available at https://www.state.gov/forced-labor-in-chinas-xinjiang-region/.

[16] Pub. L. 117-78 § 2(d)(2)(B)(v) (2021).

[17] 19 U.S.C. § 1307.

[18] Pub. L. 117-78 § 3(b) (2021).

[19] Id. at § 3(c).

[20] Id.

[21] Id. at § 2(d)(2)(B)(viii)–(ix).

[22] CBP Issues Region-Wide Withhold Release Order on Products Made by Slave Labor in Xinjiang, U.S. Customs and Border Protection (Jan. 13, 2021), https://www.cbp.gov/newsroom/national-media-release/cbp-issues-region-wide-withhold-release-order-products-made-slave.

[23] China Renewables: The Stretched Ethics of Solar Panels from Xinjiang, The Financial Times (Jan. 9, 2022), available at https://on.ft.com/3ndq1NE.

[24] Press Release, Solar Industry Statement on the Passage of the Uyghur Forced Labor Prevention Act, Solar Energy Industries Association (Dec. 16, 2021), available at https://www.seia.org/news/solar-industry-statement-passage-uyghur-forced-labor-prevention-act.

[25] Solar Industry Forced Labor Prevention Pledge, Solar Energy Industries Association (Nov. 23, 2021), available at https://www.seia.org/sites/default/files/Solar%20Industry%20Forced%20Labor%20Prevention%20Pledge%20Signatories.pdf.

[26] Solar Supply Chain Traceability Protocol 1.0: Industry Guidance, Solar Energy Industries Association (Apr. 2021), available at https://www.seia.org/sites/default/files/2021-04/SEIA-Supply-Chain-Traceability-Protocol-v1.0-April2021.pdf.

[27] Pub. L. 116-145 § 6(a)(1) (2020).

[28] 50 U.S.C. 1701 § 5(c)(1)(A) (1977).

[29] Pub. L. 116-145 § 6(a)(1) (2020).

[30] Pub. L. 117-78 § 2(d)(6) (2021).

[31] 19 C.F.R. § 12.43 (2017).

[32] See Hoshine Silicon Industry Co. Ltd Withhold Release Order Frequently Asked Questions, U.S. Customs and Border Protection (Nov. 10, 2021), https://www.cbp.gov/trade/programs-administration/forced-labor/hoshine-silicon-industry-co-ltd-withhold-release-order-frequently-asked-questions.

[33] Pub. L. 117-78 § 2(d)(6)(a) (2021).

[34] Xinjiang Supply Chain Business Advisory, supra note 5 at 7–8.

[35] Guiding Principles on Business and Human Rights, Office of the United Nations High Commissioner for Human Rights (2011), available at https://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.

[36] OECD Guidelines for Multinational Enterprises, Organisation for Economic Co-operation and Development (2011), available at https://www.oecd.org/daf/inv/mne/48004323.pdf.

[37] Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, International Labour Organization (2017), available at https://www.ilo.org/wcmsp5/groups/public/—ed_emp/—emp_ent/—multi/documents/publication/wcms_094386.pdf.

[38] Xinjiang Supply Chain Business Advisory, supra note 5 at 9.

[39] Id.

[40] Staff of Cong.-Exec. Comm’n on China, Global Supply Chains, Forced Labor, and the Xinjiang Uyghur Autonomous Region (2020), https://www.cecc.gov/sites/chinacommission.house.gov/files/documents/CECC%20Staff%20Report%20March%202020%20-%20Global%20Supply%20Chains%2C%20Forced%20Labor%2C%20and%20the%20Xinjiang%20Uyghur%20Autonomous%20Region.pdf.

[41] See MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, People’s Republic of China Ministry of Commerce (Jan. 9, 2021), available at http://english.mofcom.gov.cn/article/policyrelease/announcement/202101/20210103029708.shtml.

[42] Pub. L. 117-78 § 2(a)(1) (2021).

[43] Id. at § 2(a)(2).

[44] Id. at § 2(b)(1).

[45] Id. at § 2(c)–(e).

[46] 2021 State of the Union Address by President von der Leyen, European Commission (Sep. 15, 2021), available at https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_21_4701.

[47] Coalition Statement on European Commission’s Proposed Ban on Products Made with Forced Labour, End Uyghur Forced Labour (Sep. 21, 2021), available at https://enduyghurforcedlabour.org/news/coalition-statement-on-european-commissions-proposed-ban-on-products-made-with-forced-labour/.

[48] Sarah Anne Aarup, Ban on Uyghur imports becomes EU’s hot potato, Politico (Oct. 15, 2021), https://www.politico.eu/article/uyghur-china-europe-ban-imports-europe-trade-hot-potato-forced-labor/; Mehreen Kahn, EU urges caution on any ban on imports made with forced labour, The Financial Times (Dec. 23, 2021), https://www.ft.com/content/748a837b-ac51-4f2e-9a5d-3af780ec8444.

[49] EU urges caution on any forced labor import ban, The Washington City Times (Dec. 23, 2021), https://thewashingtoncitytimes.com/2021/12/23/eu-urges-caution-on-any-forced-labor-import-ban/.

[50] Id.

[51] Legislative Proposal on Sustainable Corporate Governance, European Parliament, Legislative Train (Dec. 17, 2021), https://www.europarl.europa.eu/legislative-train/theme-an-economy-that-works-for-people/file-legislative-proposal-on-sustainable-corporate-governance; see also Sustainable Corporate Governance, About this initiative, European Commission, available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance_en.

[52] See Emilia Casalicchio, UK hints at banning Chinese imports with forced labor links, Politico (Dec. 20, 2021), https://www.politico.eu/article/uk-could-impose-chinese-forced-labor-import-ban/.

[53] Press Release, UK Government announces business measures over Xinjiang human rights abuses, U.K. Government (Jan. 12, 2021) (U.K.), https://www.gov.uk/government/news/uk-government-announces-business-measures-over-xinjiang-human-rights-abuses; see also Fifth Special Report, Never Again: The UK’s Responsibility to Act on Atrocities in Xinjiang and Beyond: Government’s Response to the Committee’s Second Report, U.K. Parliament (Nov. 1, 2021) (U.K.), available at https://publications.parliament.uk/pa/cm5802/cmselect/cmfaff/840/84002.htm.

[54] Canada Announces New Measures to Address Human Rights Abuses in Xinjiang, China, Government of Canada (2021) (Can.), available at https://www.canada.ca/en/global-affairs/news/2021/01/canada-announces-new-measures-to-address-human-rights-abuses-in-xinjiang-china.html.

[55] See s-204 An Act to amend the Customs Tariff (goods from Xinjiang), Parliament of Canada (Can.) (2021) https://www.parl.ca/legisinfo/en/bill/44-1/s-204.

[56] Integrity Declaration on Doing Business with Xinjiang Entities, Government of Canada (2021) (Can.), available at https://www.international.gc.ca/global-affairs-affaires-mondiales/news-nouvelles/2021/2021-01-12-xinjiang-declaration.aspx?lang=eng.

[57] Id.

[58] Global Affairs Canada advisory on doing business with Xinjiang-related entities, Government of Canada (2021) (Can.), available at https://www.international.gc.ca/global-affairs-affaires-mondiales/news-nouvelles/2021/2021-01-12-xinjiang-advisory-avis.aspx?lang=eng.

[59] See Modern Slavery Act 2018, Federal Register of Legislation (Austl.), https://www.legislation.gov.au/Details/C2018A00153.

[60] See Customs Amendment (Banning Goods Produced by Forced Labour) Bill 2021 (Austl.), https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s1307

[61] Daniel Hurst, Australia Senate passes bill banning Imports made using Forced Labour, The Guardian, (Aug. 23, 2021), https://www.theguardian.com/australia-news/2021/aug/23/australian-senate-poised-to-pass-bill-banning-imports-made-using-forced-labour.

[62] Australian Senate Passes Forced Labour Bill, Freedom United (Aug. 23, 2021), https://www.freedomunited.org/news/australian-senate-passes-forced-labor-bill/.

[63] China slams New Zealand parliament’s motion on Uighur abuses, Al Jazeera (May 6, 2021), https://www.aljazeera.com/news/2021/5/6/china-slams-new-zealand-parliaments-uighur-concerns.

[64] Julia Hollingsworth, New Zealand is a Five Eyes outlier on China. It may have to pick a side, CNN (June 4, 2021), https://edition.cnn.com/2021/06/03/asia/new-zealand-xinjiang-china-intl-hnk-dst/index.html.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Selina Sagayam, Susanne Bullock, Michael Murphy and Christopher Timura, with Sean Brennan, Ruby Taylor, Natalie Harris, and Freddie Batho, recent law graduates working in the firm’s London and Washington, D.C. offices who are not yet admitted to practice law.

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As the COVID-19 pandemic continued into 2021, lawmakers and regulators around the world faced the dual-pronged challenge of reversing the slowdown in enforcement seen in 2020 while working to combat new forms of bribery and corruption that emerged as a result of the pandemic. This webcast will explore the approach taken by emerging markets in addressing these challenges and examine the trends seen in FCPA and local anti-corruption enforcement. In China, companies face increased scrutiny over their compliance programmes as the country introduces its first pilot programme for corporate criminal compliance and non-prosecution. Chinese regulators have continued their assault on key industries, such as big tech and healthcare, and sweeping reforms to data protection laws have had seismic effects on the conduct of cross-border investigations. In Russia, the topic of corruption remains a source of great tension while the complexity of sanctions regimes increases and cybercrime activities become the latest driving force behind white-collar enforcement. In Latin America, anti-corruption efforts have struggled to gain a strong foothold amid the practical challenges caused by COVID-19 and political instability in key markets.

In India, enforcement has fallen as a result of the COVID-19 pandemic and new legislation which has made it more difficult to commence investigations. State governments have also withdrawn the general consent previously provided to authorities to investigate corruption allegations, which has caused delays in resolving cases. Nevertheless, while anti-corruption enforcement remains inconsistent, recent cases highlight the heightened risks for multinationals doing business in the country. Across Africa, companies and individuals face significant fines, bidding suspensions, and other sanctions as investigations by authorities from the United States, the United Kingdom, the World Bank, and African authorities concluded in several countries in the region. Meanwhile, high-profile trials of former heads of state, including Benjamin Netanyahu and Jacob Zuma, resumed after delays due to the pandemic and claims of bias and political interference.

Join our team of experienced international anti-corruption attorneys to learn more about how to do business in China, Russia, Latin America, India and across Africa without running afoul of anti-corruption laws, including the Foreign Corrupt Practices Act (“FCPA”).

Topics to be Discussed:

An overview of FCPA enforcement statistics and trends for 2021;
The corruption landscape in key emerging markets, including recent headlines and scandals;
Lessons learned from local anti-corruption enforcement in China, Russia, Latin America, India, and across Africa;
Key anti-corruption legislative changes in China, Russia, Latin America, India, and across Africa;
The effect of COVID-19 on corruption and anti-corruption efforts; and
Mitigation strategies for businesses operating in high-risk areas

View Slides (PDF)

MODERATOR:

F. Joseph Warin is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and he is chair of the over 200-person Litigation Department of the Washington, D.C. office. Mr. Warin is ranked in the top-tier year after year by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations experience. He has handled cases and investigations in more than 40 states and dozens of countries involving federal regulatory inquiries, criminal investigations and cross-border inquiries by international enforcers, including UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East. Mr. Warin has served as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ.

PANELISTS:

Kelly Austin is Partner-in-Charge of Gibson Dunn’s Hong Kong office and a member of the firm’s Executive Committee. Ms. Austin is ranked annually in the top-tier by Chambers Asia Pacific and Chambers Global in Corporate Investigations/Anti-Corruption: China. Her practice focuses on government investigations, regulatory compliance and international disputes. Ms.. Austin has extensive expertise in government and corporate internal investigations, including those involving the FCPA and other anti-corruption laws, and anti-money laundering, securities, and trade control laws.

Joel Cohen is Co-Chair of the firm’s global White Collar Defense and Investigations Practice Group and a partner in the New York office. Mr. Cohen’s successful defense of clients has been noted in numerous feature articles in the American Lawyer and the National Law Journal, including for pretrial dismissal of criminal charges and trial victories. He is highly-rated in Chambers and named by Global Investigations Review as a “Super Lawyer” in Criminal Litigation. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.

Benno Schwarz is Co-Chair of the firm’s Anti-Corruption & FCPA Practice Group and a partner in the Munich office, where his practice focuses on white collar defense and compliance investigations. Mr. Schwarz is ranked annually as a leading lawyer for Germany in White Collar Investigations/Compliance by Chambers Europe and was named by The Legal 500 Deutschland 2021 and The Legal 500 EMEA 2021 as one of four Leading Individuals in Internal Investigations, and also ranked for Compliance. He is noted for his “special expertise on compliance matters related to the USA and Russia.” Mr. Schwarz advises companies on sensitive cases and investigations involving compliance issues with international aspects, such as the implementation of German or international laws in anti-corruption, money laundering and economic sanctions, and he has exemplary experience advising companies in connection with FCPA and NYDFS monitorships or similar monitor functions under U.S. legal regimes.

Patrick Stokes is Co-Chair of the firm’s Anti-Corruption and FCPA Practice Group and a partner in the Washington, D.C. office, where he focuses his practice on internal corporate investigations, government investigations, enforcement actions regarding corruption, securities fraud, and financial institutions fraud, and compliance reviews. Mr. Stokes is ranked nationally and globally by Chambers USA and Chambers Global as a leading attorney in FCPA. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit.

Karthik Ashwin Thiagarajan is of counsel in the Singapore office. He represents clients in transactional, compliance and anti-corruption matters across the South Asia and ASEAN regions. Mr. Thiagarajan advises multi-national corporations on acquisitions, joint ventures and divestments across key emerging markets in Asia, including India and Indonesia. He frequently assists clients with internal investigations, anti-corruption reviews and regulatory actions in these markets.

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China’s Anti-Monopoly Law (“AML”) was adopted in 2007 and talks about possible amendments have regularly surfaced in the last few years. The State Administration for Market Regulation (“SAMR”) released a draft amendment for public comments in early 2020. The process is now accelerating with a formal text (“AML Amendment”) submitted to the thirty-first session of the Standing Committee of the National People’s Congress for first reading on 19 October 2021. This client alert summarizes the main proposed changes to the AML, which have been published for comments.[1]

1. Targeting the digital economy

Emphasis on the digital economy. Technology firms and digital markets have been the subject of a broad regulatory assault in China, including one that is based on the AML. SAMR has published specific guidelines on the application of the AML to platforms in early 2021 and has imposed significant fines on these market players in the last months. For example, SAMR fined Meituan, an online food delivery platform provider, RMB 3.44 billion (~$534 million) for abusing its dominant position.[2] The AML Amendment specifically refers to enforcement in the digital economy by making it clear that undertakings shall not exclude or restrict competition by abusing the advantages in data and algorithms, technology and capital and platform rules. At the same time, the objectives to the AML have also been updated to include “encouraging innovation.” Going forward, SAMR will need to tread the delicate line between encouraging digital innovation and curbing such advancement where it constitutes abusive market behaviour. In the most recent year, at least, in practice there has been an emphasis on enforcement rather than fostering innovation, a trend we anticipate will continue.

2. Substantive changes

Cartel facilitators. The AML arguably does not cover the behaviour of undertakings facilitating anticompetitive conduct, in particular cartels. The AML Amendment fills the gap by extending the scope of the AML to the organisation or provision of material assistance in reaching anticompetitive- agreements. This effectively means that the AML will be extended to cover behaviour leading up to the conclusion of such agreements, and third parties may be found in breach by virtue of their role in aiding the conclusion of cartels.

Abandoning per se treatment of resale price maintenance. The application of the AML to resale price maintenance (“RPM”) is confusing. While SAMR seems to apply a strict “per se” approach, the courts have generally adopted a rule of reason analysis, only prohibiting RPM when it led to anticompetitive effects.[3] The AML Amendment seems to favour the courts’ approach by providing that RPM is not prohibited if the supplier can demonstrate the absence of anticompetitive effects.

Safe harbour for anticompetitive agreements. The AML Amendment introduces a safe harbour for anticompetitive agreements. Agreements between undertakings that have a market share lower than a specific threshold to be set by SAMR will not be prohibited unless there is evidence that the agreement has anticompetitive effects. Given that this is not a complete exemption from the prohibition, it is very much the question whether this safe harbour will be at all useful to undertakings.

Merger review of sub-threshold transactions. The State Council Regulation on the Notification Thresholds for Concentrations of Undertakings already provides SAMR with the right to review transactions that do not meet the thresholds for mandatory review. This right would now directly be enshrined in the AML.

Stop-the-clock in merger investigations. SAMR will have the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved. It seems that this mechanism may be used to replace the “pull-and-refile” in contentious merger investigations.

3. Increased penalties

Penalties on individuals. The AML Amendment would introduce personal liability for individuals. In particular, if the legal representative, principal person-in-charge or directly responsible person of an undertaking is personally responsible for reaching an anticompetitive agreement, a fine of not more than RMB 1 million (~$157,000) can be imposed on that individual. At this stage, however, cartel leniency is not available to individuals.

Penalties on cartel facilitators. As explained above, cartel facilitators will be liable for their conduct. They risk penalties of not more than RMB 1 million (~$157,000).

Increased penalties for merger-related conduct. One of the weaknesses of the AML is the very low fines for gun jumping (limited to RMB 500,000). The AML Amendment now states that where an undertaking implements a concentration in violation of the AML, a fine of less than 10% of the sales from the preceding year shall be imposed. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~$780,000).

Superfine. SAMR can multiply the amount of the fine by a factor between 2 and 5 in case it is of the opinion that the violation is “extremely severe”, its impact is “extremely bad” and the consequence is “especially serious.” There is no definition of what these terms mean and this opens the door to very significant and potentially arbitrary fines.

Public interest lawsuit. Finally, public prosecutors (i.e. the people’s procuratorate) can bring a civil public interest lawsuit against undertakings they have acted against social and public interests by engaging in anticompetitive conduct.

______________________________

[1] National People’s Congress of the People’s Republic of China, “Draft Amendment to the Anti-Monopoly Law” (中华人民共和国反垄断法(修正草案)) (released on October 25, 2021), available at http://www.npc.gov.cn/flcaw/flca/ff8081817ca258e9017ca5fa67290806/attachment.pdf.

[2] SAMR, “Announcement of SAMR’s Penalty To Penalise Meituan’s Monopolistic Behaviour In Promoting “Pick One Out Of Two” In The Online Food Delivery Platform Service Market” (市场监管总局依法对美团在中国境内网络餐饮外卖平台服务市场实施“二选一”垄断行为作出行政处罚) (released on October 8, 2021), available at http://www.samr.gov.cn/xw/zj/202110/t20211008_335364.html.

[3] Gibson Dunn, “Antitrust in China – 2018 Year in Review” (released on February 11, 2019), available at https://www.gibsondunn.com/antitrust-in-china-2018-year-in-review/.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard, Bonnie Tong, and Jane Lu.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Ali Nikpay – London (+44 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On August 20, 2021, the Standing Committee of China’s National People’s Congress passed the Personal Information Protection Law (“PIPL”), which will take effect on November 1, 2021. We previously reported on this development here, when the law was in draft form. An unofficial translation of the newly enacted PIPL is available here and the Mandarin version of the PIPL is available here.[1]

The PIPL applies to “personal information processing entities (“PIPEs”),” defined as “an organisation or individual that independently determines the purposes and means for processing of personal information.” (Article 73). The PIPL defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” excluding anonymized information, and defines “processing” as “the collection, storage, use, refining, transmission, provision, public disclosure or deletion of personal information.” (Article 4).

The PIPL shares many similarities with the EU’s General Data Protection Regulation (the “GDPR”), including its extraterritorial reach, restrictions on data transfer, compliance obligations and sanctions for non-compliance, amongst others. The PIPL raises some concerns for companies that conduct business in China, even where such companies’ data processing activities take place outside of China, and the consequences for failing to comply could potentially include monetary penalties and companies being placed on a government blacklist.

Below, we describe the companies subject to the PIPL, key features of the PIPL, and highlight critical issues for companies operating in China in light of this important legislative development.

I. Which Companies are Subject to PIPL?

The PIPL applies to cross-border transmission of personal information and applies extraterritorially. Where PIPEs transmit personal information to entities outside China, they must inform the data subjects of the transfer, obtain their specific consent to the transfer, and ensure that the data recipients satisfy standards of personal information protection similar to those in the PIPL.The PIPL applies to organisations operating in China, as well as to foreign organisations and individuals processing personal information outside China in any one of the following circumstances: (1) the organisation collects and processes personal data for the purpose of providing products or services to natural persons in China; (2) the data will be used in analysing and evaluating the behaviour of natural persons in China; or (3) under other unspecified “circumstances stipulated by laws and administrative regulations” (Article 3). This is an important similarity between the PIPL and GDPR, as the GDPR’s data protection obligations apply to non-EU data controllers and processors that track, analyze and handle data from visitors within the EU. Similarly, under the PIPL, a foreign receiving party must comply with the PIPL’s standard of personal information protection if it handles personal information from natural persons located in China.
The PIPL gives the Chinese government broad authority in processing personal information. State organisations may process personal information to fulfil statutory duties, but may not process the data in a way that exceeds the scope necessary to fulfil these statutory duties (Article 34). Personal information processed by state organisations must be stored within China (Article 36).

II. Key Features of PIPL

The PIPL establishes guiding principles on protection of personal information. According to the PIPL, processing of personal information should have a “clear and reasonable purpose” and should be directly related to that purpose (Article 6). The PIPL requires that the collection of personal information be minimized and not excessive (Article 6), and requires PIPEs to ensure the security of personal information (Articles 8-9). To that end, the PIPL imposes a number of compliance obligations on PIPEs, including requiring PIPEs to establish policies and procedures on personal information protection, implement technological solutions to ensure data security, and carry out risk assessments prior to engaging in certain processing activities (Articles 51 – 59).
The PIPL adopts a risk-based approach, imposing heightened compliance obligations in specified high-risk scenarios. For instance, PIPEs whose processing volume exceeds a yet-to-be-specified threshold must designate a personal information protection officer responsible for supervising the processing of personal data (Article 52). PIPEs operating “internet platforms” that have a “very large” number of users must engage an external, independent entity to monitor compliance with personal information protection obligations, and regularly publish “social responsibility reports” on the status of their personal information protection efforts (Article 58).The law mandates additional protections for “sensitive personal information,” broadly defined as personal information that, once disclosed or used in an illegal manner, could infringe on the personal dignity of natural persons or harm persons or property (Article 28). “Sensitive personal information” includes biometrics, religious information, special status, medical information, financial account, location information, and personal information of minors under the age of 14 (Article 28). When processing “sensitive personal information,” according to the PIPL, PIPEs must only use information necessary to achieve the specified purpose of the collection, adopt strict protective measures, and obtain the data subjects’ specific consent (Article 28-29).
The PIPL creates legal rights for data subjects. According to the new law, PIPEs may process personal information only after obtaining fully informed consent in a voluntary and explicit statement, although the law does not provide additional details regarding the required format of this consent. The law also sets forth certain situations where obtaining consent is unnecessary, including where necessary to fulfil statutory duties and responsibilities or statutory obligations, or when handling personal information within a reasonable scope to implement news reporting, public opinion supervision and other such activities for the public interest (Articles 13-14, 17). Where consent is required, PIPEs should obtain a new consent where it changes the purpose or method of personal information processing after the initial collection (Article 14). The law also requires PIPEs to provide a convenient way for individuals to withdraw their consent (Article 15), and mandates that PIPEs keep the personal information only for the shortest period of time necessary to achieve the original purpose of the collection (Article 19).If PIPEs use computer algorithms to engage in “automated decision making” based on individuals’ data, the PIPEs are required to be transparent and fair in the decision making, and are prohibited from using automated decision making to engaging in “unreasonably discriminatory” pricing practices (Article 24, 73). “Automated decision-making” is defined as the activity of using computer programs to automatically analyze or assess personal behaviours, habits, interests, or hobbies, or financial, health, credit, or other status, and make decisions based thereupon (Article 73(2)).When individuals’ rights are significantly impacted by PIPEs’ automated decision making, individuals can demand PIPEs to explain the decision making and decline automated decision making (Article 24).

III. Potential Issues for Companies Operating in China

The passage of the PIPL and the uncertainty surrounding many aspects of the law creates a number of potential issues and concerns for companies operating in China. These include the following:

Foreign organisations may be subject to the PIPL’s regulatory requirements. The PIPL applies to data processing activities, even where those activities take place outside of China, provided they are carried out for the purpose of conducting business in China or evaluating individuals’ behavior in the country. The law is currently silent on how close the nexus must be between the data processing and Chinese business activities. The law also mandates that data processing activities taking place outside of China are subject to the PIPL under “other circumstances stipulated by laws and administrative regulations.” At present there is no guidance as to what these circumstances will be.Foreign organisations subject to the PIPL will need to comply with requirements including security assessments, assigning local representatives to oversee data processing, and reporting to supervisory agencies in China, though the exact parameters of these requirements remain unclear (Articles 51–58).
The PIPL creates penalties for organisations that fail to fulfil their obligations to protect personal information (Article 66). These penalties include disgorgement of profits and provisional suspension or termination of electronic applications used by PIPEs to conduct the unlawful collection or processing. Companies and individuals may be subject to a fine of not more than 1 million RMB (approximately $154,378.20) where they fail to remediate conduct found to be in violation of the PIPL, with responsible individuals subject to fines of 10,000 to 100,000 RMB (approximately $1,543.81 to $15,438.05).Companies and responsible individuals face particularly stringent penalties where the violations are “grave,” a term left undefined in the statute. In these cases, the PIPL allows for fines of up to 50 million RMB (approximately $7,719,027.00) or 5% of annual revenue, although the PIPL does not specify which parameter serves as the upper limit for the fines. Authorities may also suspend the offending business activities, stop all business activities entirely, or cancel all administrative or business licenses. Individuals responsible for “grave” violations may be fined between 100,000 and 1 million RMB (approximately $15,438.29 to $154,382.93), and may also be prohibited from holding certain job titles, including Director, Supervisor, high-level Manager or Personal Information Protection Officer, for a period of time. In contrast, fines for severe violations of the GDPR can be up to €20 million (approximately $23,486,300.00) or up to 4% of the undertaking’s total global turnover of the preceding fiscal year (whichever is higher).
Foreign organisations may also be subject to consequences under the PIPL for violating Chinese citizens’ personal information rights or harming China’s national security or public interest. The state cybersecurity and informatization department may place offending organisations on a blacklist, resulting in restrictions on receiving personal information for blacklisted entities (Article 42). The PIPL does not provide clarity on what constitutes a violation of Chinese citizens’ personal information rights or what qualifies as harming China’s national security or public interest.

Companies operating in China should pay particular attention to the cross-border data transfer issues raised by the PIPL:

Foreign organisations will need to disclose certain information when transferring personal information outside of China’s borders. Under the PIPL, PIPEs must obtain the data subject’s consent prior to transfer, although the required form and method of that consent is not clear (Article 39). Entities seeking to transfer data must also provide the data subject with information about the foreign recipient, including its name, contact details, purpose and method of the data processing, the categories of personal information provided and a description of the data subject’s rights under the PIPL (Article 39).
Certain companies may need to undergo a government security assessment prior to cross-border data transfers. In addition to the consent and disclose requirements under Article 39, “critical information infrastructure operators” and PIPEs processing personal information in quantities exceeding government limits must pass a government security assessment prior to transferring data outside of China (Article 40). The term “critical information infrastructure operator” is not further defined within the PIPL, the term is, however, broadly defined within the newly passed Regulations on the Security and Protection of Critical Information Infrastructure (the “Regulations on Critical Information Infrastructure”), which come into effect on September 1, 2021 (the Mandarin version is available here). Under Article 2 of the Regulations on Critical Information Infrastructure, a “critical information infrastructure operator” is a company engaged in important industries or fields, including public communication and information services, energy, transport, water, finance, public services, e-government services, national defense and any other important network facilities or information systems that may seriously harm national security, the national economy and people’s livelihoods, or public interest in the event of incapacitation, damage or data leaks.The PIPL also does not specify the data thresholds beyond the quantities provided by the state cybersecurity and information department or the nature of the security assessment, nor does it reference any specific legislation issued by the state cybersecurity and informatization department for purposes of determining such data thresholds (Article 40).
PIPEs outside China that conduct personal data processing activities for the purpose of conducting business in China or evaluating individuals’ behaviour in the country must establish an entity or appoint an individual within China to be responsible for personal information issues. Such foreign organisations must report the name of the relevant entity or the representative’s name and contact method to the departments fulfilling personal information protection duties, although the PIPL does not specify or name to which departments foreign organisations must report in such instances (Article 53).
Companies and individuals may not provide personal information stored within China to foreign judicial or enforcement agencies, without prior approval of the Chinese government. As summarized in our prior client alert, the PIPL adds to a growing list of laws that restrict the provision of data to foreign judiciaries and government agencies, which could have a far-reaching impact on cross-border litigation and investigations. Chinese authorities will process requests from foreign judicial or enforcement agencies for personal information stored within China in accordance with applicable international treaties or the principle of equality and reciprocity (Article 41). The PIPL does not provide any guidance on how a company should seek approval if it wishes to export personal data in response to a request from a foreign government agency or a foreign court.

IV. Next Steps

The passage of the PIPL comes during a time where China has increased its regulatory scrutiny on technology companies and other entities with large troves of sensitive public information, and their data usage. Given the broad scope of the PIPL and its extraterritorial reach, organisations inside and outside of China will need to review their data protection and transfer strategies to ensure they do not run afoul of this network of legislation.

Even for companies that currently have GDPR compliance programs in place, the PIPL introduces new requirements not currently required under the GDPR. Examples of such requirements unique to the PIPL include, amongst others, establishing a legal entity within China and passing a security review prior to exporting personal data that reaches a certain undisclosed threshold. How the government enforces the statute and interprets its provisions remain to be seen, and a PIPL compliance program will likely require a nuanced understanding of Chinese cultural and business practices.

Companies operating in China should pay close attention to regulations, guidance documents and enforcement actions related to the PIPL as the Chinese government continues to bolster its data protection legal infrastructure, and seek guidance from knowledgeable counsel.

___________________________

[1] Please note that the discussion of Chinese law in this publication is advisory only.

This alert was prepared by Connell O’Neill, Kelly Austin, Oliver Welch, Ning Ning, Felicia Chen, and Jocelyn Shih.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Privacy, Cybersecurity and Data Innovation practice group, or the following authors:

Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Oliver D. Welch – Hong Kong (+852 2214 3716, owelch@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation Group:

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The People’s Republic of China is clamping down on the extraction of litigation- and investigation-related corporate and personal data from China—and this may squeeze litigants and investigation subjects in the future. Under a new data security law enacted late last week and an impending personal information protection law, China is set to constrict sharing broad swaths of personal and corporate data outside its borders. Both statutes would require companies to obtain the approval of a yet-to-be-identified branch of the Chinese government before providing data to non-Chinese judicial or law enforcement entities. As detailed below, these laws could have far-reaching implications for companies and individuals seeking to provide data to foreign courts or enforcement agencies in the context of government investigations or litigation, and appear to expand the data transfer restrictions set forth in other recent Chinese laws.[1]

Data Security Law of the People’s Republic of China

On June 10, 2021, the National People’s Congress passed the Data Security Law, which will take effect on September 1, 2021. The legislation contains sweeping requirements and severe penalties for violations. It governs not only data processing and management activities within China, but also those outside of China that “damage national security, public interest, or the legitimate interests of [China’s] citizens and organizations.”[2]

The Data Security Law generally requires entities and individuals operating within China to implement systems designed to protect in-country data. For example, entities that handle “important” data—a term not yet defined by the statute—must designate personnel responsible for data security and conduct assessments to monitor potential risks.[3] Chinese authorities may issue fines up to 500,000 CNY (approximately $78,000) and mandate remedial actions if an entity does not satisfy these requirements.[4] If the entity fails to implement required remedial actions after receiving a warning and/or its failure to implement adequate controls result in a large-scale data breach, the entity may be subject to a fine of up to 2 million CNY (approximately $313,000). Under these circumstances, authorities also may revoke the offending entity’s business licenses and issue fines to responsible individuals.[5]

The Data Security Law also states that a “violation of the national core data management system or endangering China’s national sovereignty, security, and development interests” is punishable by an additional fine up to 10 million CNY (approximately $1.56 million), suspension of business, revocation of business licenses, and in severe cases, criminal liability.[6] The Data Security Law broadly defines “core data” to include “data related to national security, national economy, the people’s welfare, and major public interests.”[7]

Most notably, Article 36 of the Data Security Law prohibits “provid[ing] data stored within the People’s Republic of China to foreign judicial or law enforcement bodies without the approval of the competent authority of the People’s Republic of China.”[8] The law does not identify the “competent authority” or outline the approval process. Failure to obtain this prior approval may subject an entity to a fine of up to 1,000,000 CNY (approximately $156,000), as well as additional fines for responsible individuals.[9] Although the Data Security Law discusses different categories of covered data elsewhere in the legislative text—referring to, for example, the “core data” discussed above[10]—Article 36, as written, appears to apply to the transfer of any data, regardless of subject matter and sensitivity, so long as it is stored in China. The final legislative text also includes additional, heavier penalties for severe violations that had not been included in prior drafts, including a fine of up to 5 million CNY (approximately $780,000), suspension of business operations, revocation of business licenses, as well as increased fines for responsible individuals. The statute does not, however, define what violations would be considered “severe.”

While the legal community in and outside of China will certainly seek additional guidance from the Chinese government, it is unclear whether the Chinese government will release implementing regulations or other guidance materials before September 1, 2021, when the law takes effect. As a point of reference, the Chinese government has not issued additional guidance on the International Criminal Judicial Assistance Law, which prohibits, among other things, unauthorized cooperation of a broad nature with foreign criminal authorities, since the law was passed in 2018. Nevertheless, given that data security and privacy are one of Beijing’s areas of focus, it is possible that the Chinese government will issue regulations, statutory interpretation, or guidance to clarify certain key requirements in the Data Security Law.

Personal Information Protection Law of the People’s Republic of China

On April 29, 2021, China released the second draft of its Personal Information Protection Law, which seeks to create a legal framework similar to the European Union’s General Data Protection Regulations (“GDPR”). The draft Personal Information Protection Law, if passed, will apply to “personal information processing entities (“PIPEs”),” defined as “an organization or individual that independently determines the purposes and means for processing of personal information.”[11] The draft Personal Information Protection Law defines processing as “the collection, storage, use, refining, transmission, provision, or public disclosure of personal information.”[12] The draft Personal Information Protection Law also defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” but excludes anonymized information.[13]

The draft Personal Information Protection Law requires PIPEs that process certain volumes of personal data to adopt protective measures, such as designating a personal information protection officer responsible for supervising the processing of applicable data.[14] PIPEs also would be required to carry out risk assessments prior to certain personal information processing and conduct regular audits.[15]

Under Article 38 of the draft Personal Information Protection Law, the Cyberspace Administration of China (“CAC”) will provide a standard contract for PIPEs to reference when entering into contracts with data recipients outside of China. The draft Personal Information Protection Law provides that PIPEs may only transfer personal information overseas if the PIPE: (1) passes a security assessment administered by the CAC; (2) obtains certification from professional institutions in accordance with the rules of the CAC; (3) enters into a transfer agreement with the transferee using the standard contract published by the CAC; or (4) adheres to other conditions set forth by law, administrative regulations, or the CAC.[16] Like the Data Security Law, the draft Personal Information Protection Law does not elaborate on this requirement, including what types of certifications would satisfy the requirement under Article 38 or what “other conditions set forth by law, administrative regulations, or the CAC” entail.

Similar to Article 36 of the Data Security Law, Article 41 of the draft Personal Information Protection Law prohibits providing personal data to judicial or law enforcement bodies outside of China without prior approval of competent Chinese authorities.[17] As with the Data Security Law, neither the “competent Chinese authority” nor the approval process is further defined, however.

The draft Personal Information Protection Law does not include penalties specifically tied to Article 41, but does set forth general penalty provisions in Article 65, which include confiscation of illegal gains, and a basic fine of up to 1 million CNY (approximately $156,000) for companies and between 10,000 CNY and 100,000 CNY (approximately $15,600 to $156,000) for responsible persons.[18] “Severe violations,” which the statute does not define, may be punishable by a fine up to 50 million CNY (approximately $7.8 million ) or up to five percent of the company’s annual revenue for the prior financial year, as well as fines between 100,000 CNY to 1 million CNY (approximately $156,000 to $1.56 million) for responsible persons. Additionally, companies found to have violated the Personal Information Protection Law may be subject to revocation of business permits or suspension of business activities entirely.

The Data Security Law and Personal Information Protection Law in Context

The Data Security Law and, if enacted, the Personal Information Protection Law add to a growing list of Chinese laws that restrict the provision of data to foreign governments. For example:

The International Criminal Judicial Assistance Law bars entities and individuals in China from providing foreign enforcement authorities with evidence, materials, or assistance in connection with criminal cases without the consent of the Chinese government.[19]
Article 177 of the China Securities Law (2019 Revision), prohibits “foreign regulators from directly conducting investigations and collecting evidence” in China and restricts Chinese companies from transferring documents related to their securities activities outside of China unless they obtain prior approval from the China Securities Regulatory Commission.
The newly released draft amendment to China’s Anti-Money Laundering Law contains disclosure and pre-approval requirements for Chinese companies responding to data requests by foreign regulators.
As Gibson Dunn has previously covered, the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, issued by the Ministry of Commerce of the PRC in January 2021, established a mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue prohibitions against compliance with these foreign laws.

The Data Security Law and draft Personal Information Protection Law, however, appear to surpass these prior prohibitions in several key respects. In contrast to the International Criminal Judicial Assistance Law, for example, the Data Security Law and draft Personal Information Protection Law do not require the data to be provided in the context of a criminal investigation for the transfer prohibitions to apply. The new restrictions ostensibly apply to data transfers in connection with a civil enforcement action or investigation, such as those conducted by the U.S. Securities and Exchange Commission. (They might also create yet another impediment to the provision of audit work papers by China-based accounting firms to the SEC and the Public Company Accounting Oversight Board.) As written, the Data Security Law and draft Personal Information Protection Law prohibitions also would also apply to Chinese parties in civil litigation before foreign courts that may need to submit evidence in connection with ongoing cases. In fact, the current language could be read to prohibit non-Chinese citizens residing in China from providing information about themselves to their own government regulators, so long as the data is “stored in China.” The Data Security Law does not explain when data is “stored in China,” or how to address potential scenarios in which entities or individuals may have a legal obligation to submit information to foreign judicial or law enforcement authorities.

The Data Security Law, draft Personal Information Protection Law and earlier laws restricting data transfers create a great deal of uncertainty for companies operating in China. Because these laws do not specify the process for obtaining government approvals, the criteria for approval, or the responsible government agency, it has become increasingly difficult for companies to determine how to respond to foreign regulators’ demands to produce data that may be stored in China, conduct internal investigations in China in the context of an ongoing enforcement action or foreign government investigation, or comply with disclosure and cooperation obligations under various forms of settlement agreements with foreign authorities such as deferred prosecution agreements. Companies considering self-reporting potential legal violations in China to their foreign regulators, as well as cooperating in ensuing investigations conducted by those regulators, also will need to consider whether any of the relevant data was previously “stored in China,” and if so, whether they are permitted to submit such data to foreign authorities without approval by Chinese authorities. The new statutes also raise concerns for professional services organizations, such as law firms, accounting and forensic firms, litigation experts, and others whose work product may reflect data that was “stored in China.” The new laws do not make clear how they might apply to work product that is simply based on, reflects or incorporates data stored in China, and whether professional services firms are required to seek approval from relevant Chinese authorities before sharing such work product in foreign judicial proceedings or with enforcement authorities.

Gibson Dunn will continue to closely monitor these developments, as should companies operating in China, in order to minimize the risks associated with being caught in the vice of inconsistent legal obligations.

________________________

[1] Please note that the discussions of Chinese law in this publication are advisory only.

[2] Data Security Law, Art. 1 and 2.

[3] Data Security Law, Art. 27, 29, 30.

[4] Data Security Law, Art. 45

[5] Data Security Law, Art. 45.

[6] Data Security Law, Art. 45.

[7] Data Security Law, Art. 21.

[8] Data Security Law, Art. 36.

[9] Data Security Law, Art. 48.

[10] Data Security Law, Art. 21.

[11] Draft Personal Information Protection Law Art. 4, 72.

[12] Draft Personal Information Protection Law, Art. 4.

[13] Ibid.

[14] Draft Personal Information Protection Law, Art. 52.

[15] Draft Personal Information Protection Law, Art. 54, 55.

[16] Draft Personal Information Protection Law, Art. 38

[17] Draft Personal Information Protection Law, Art. 41.

[18] Draft Personal Information Protection Law, Art. 65.

[19] International Criminal Judicial Assistance Law, Art. 4.

The following Gibson Dunn lawyers assisted in preparing this client update: Patrick F. Stokes, Oliver Welch, Nicole Lee, Ning Ning, Kelly S. Austin, Judith Alison Lee, Adam M. Smith, John D.W. Partridge, F. Joseph Warin, Joel M. Cohen, Ryan T. Bergsieker, Stephanie Brooker, John W.F. Chesley, Connell O’Neill, Richard Roeder, Michael Scanlon, Benno Schwarz, Alexander H. Southwell, and Michael Walther.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Anti-Corruption and FCPA, White Collar Defense and Investigations, International Trade, and Privacy, Cybersecurity and Data Innovation practice groups:

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Oliver D. Welch – Hong Kong (+852 2214 3716, owelch@gibsondunn.com)

Europe:
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

United States:
Judith Alison Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
John W.F. Chesley – Washington, D.C. (+1 202-887-3788, jchesley@gibsondunn.com)
Joel M. Cohen – New York (+1 212-351-2664, jcohen@gibsondunn.com)
John D.W. Partridge – Denver (+1 303-298-5931, jpartridge@gibsondunn.com)
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Patrick F. Stokes – Washington, D.C. (+1 202-955-8504, pstokes@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Happy New Year of the Ox! Despite the COVID-19 pandemic, China’s antitrust enforcement remained robust in 2020. On the merger front, the State Administration for Market Regulation (“SAMR”) unconditionally approved more than 99 percent of the 458 deals reviewed and only imposed conditions in four transactions. SAMR also issued a flurry of new guidelines in the antitrust space that provide more guidance on its enforcement priorities and its interpretation of the law.

2021 could be a pivotal year as the Chinese government is considering changes to the PRC Anti-Monopoly Law (“AML”), including increased fines for failure to notify transactions. There are also a number of guidelines that have been published for comments in 2020 and could be adopted in 2021. Finally, SAMR seems intent on vigorously enforcing the AML in the internet space, which could lead to landmark decisions in 2021.

1. Legislative / Regulatory Developments

2020 saw an active year in the consolidation of often overlapping regulations – a legacy from the tri-agency era – and the introduction of new regulations and guidelines. Most notably, apart from the draft amendments to the Anti-Monopoly Law on January 2, 2020, which we have covered in our Antitrust in China – 2019 Year in Review,[1] SAMR introduced new guidelines addressing competition issues relating to, among other subjects, the automobile industry, the platform economy, intellectual property rights, leniency, and commitments. A summary of these new guidelines is set forth below. In addition, SAMR published several draft guidelines for consultation, including the Guidelines on Companies’ Anti-Monopoly Compliance Abroad and the Anti-Monopoly Guidelines in the Area of Active Pharmaceutical Ingredients.

Automobile Sector: In the past decade, SAMR (and its predecessors) has undertaken significant enforcement actions against car manufacturers and distributors. Drawing from the various agencies’ law enforcement experience, SAMR issued the (long-awaited) Anti-Monopoly Guidelines for the Automobile Sector (“Automobile Guidelines”)[2] on September 18, 2020.

While acknowledging that the automobile manufacturing market as a whole is competitive, the Automobile Guidelines nevertheless provide important provisions with regard to abuses of a dominant position in aftermarket parts and services. In particular, the Automobile Guidelines note that automobile manufacturers that do not hold a dominant market position in manufacturing could nevertheless be held to be in a dominant position in aftermarkets, which include the production and supply of aftermarket spare parts and the availability of technical repair information, equipment, and tools.

The Automobile Guidelines also provide guidance with regard to resale price maintenance (“RPM”). While noting that RPM should be prohibited, the Automobile Guidelines specify several circumstances in which RPM may be exempted from the prohibition. For example, an automobile manufacturer may directly conduct price negotiations and agree on a purchase price with a customer if the distributor is merely an intermediary who plays only a supporting role limited to invoice issuance, delivery of vehicle, and receipt of payment.

Finally, under the Automobile Guidelines, car manufacturers with a market share of less than 30 percent are permitted to impose certain vertical restrictions on distributors. For example, a qualifying manufacturer may generally impose restrictions to prevent a distributor from making any active sales to customers outside of that distributor’s allocated territory.

Platform Economy Sector: SAMR issued Anti-Monopoly Guidelines for the Platform Economy Sector on February 7, 2021 (“Platform Guidelines”).[3] This follows a string of actions taken by the Chinese government to regulate the internet platform sector, most notably its suspension of the initial public offering by Ant Group.

Recognizing that there are difficulties in applying traditional antitrust enforcement approaches to the platform economy sector, the Platform Guidelines provide tailored and specific guidance regarding, among other areas, concentrations of undertakings, monopoly agreements, and abuses of dominance. For example, the Platform Guidelines acknowledge the complexity of the platform economy and that a market would not necessarily be defined by reference to an undertaking’s basic services. As a result, SAMR will take into account the possible network effects in determining if the platform is a distinct market or one that involves multiple related markets.

Moreover, the Platform Guidelines set out types of agreements that may constitute monopoly agreements, some of which go beyond the traditional written or verbal agreements or meeting of minds. Significantly, the Platform Guidelines provide that the use of technical methods, data, and algorithms may constitute horizontal or vertical monopoly agreements. Similarly, a most favored nation clause may constitute a vertical monopoly agreement. The Platform Guidelines also prohibit hub-and-spoke agreements, recognizing that competitors may reach a hub-and-spoke agreement through either a vertical relationship with the platform operator or the organization and coordination of the platform operator.

In addition, the Platform Guidelines provide that if a platform is considered an “essential facility,” the platform operator must not, without any justification, refuse to deal with operators who want to use it. In determining whether a platform constitutes an essential facility, SAMR may consider the substitutability of other platforms, the existence of a potential alternative, the feasibility of developing a competitive platform, the degree of dependence of the operators on the platform, and the possible impact of an open platform on the platform operator.

Finally, on merger control, the Platform Guidelines provide that transactions involving Variable Interest Entities (“VIEs”) must obtain merger clearance if the transaction meets the notification thresholds. This puts an end to the uncertainty surrounding transactions involving VIEs, which by and large were never notified. This announcement was expected given that in July 2020,[4] SAMR for the first time accepted the filing of and later unconditionally approved a transaction involving a VIE structure. The Platform Guidelines also reiterate that SAMR has the discretion to investigate sub-threshold transactions, especially if (1) the transactions involve a start-up or an emerging platform; (2) the undertaking has a low turnover because it operates a business model involving the provision of free-of-charge or low pricing services; or (3) the relevant market is highly concentrated.

Intellectual Property Rights: On September 18, 2020, SAMR published the Anti-Monopoly Guidelines in the Field of Intellectual Property Rights (“IP Guidelines”),[5] which provide clearer guidance on the interplay between the AML and intellectual property rights, and set out a framework for competition analysis and factors that SAMR will take into account when carrying out competition analysis on matters relating to intellectual property rights.

At the outset, the IP Guidelines acknowledge that an undertaking’s exercise of intellectual property rights will not violate the AML unless the undertaking’s conduct or the underlying transaction is anti-competitive. The IP Guidelines address a number of intellectual property-related agreements that could be considered anti-competitive, including joint research and development pacts, cross-licensing, grant-backs, no-challenge clauses, and standard-setting activities. Under the IP Guidelines, in carrying out a competition analysis, SAMR will consider, among other factors, the content, degree, and implementation of the restrictions. The IP Guidelines also provide safe harbor rules: where an undertaking involved in a horizontal monopoly agreement has a market share not exceeding 20 percent or where an undertaking involved in a vertical monopoly agreement has a market share not exceeding 30 percent, it may be presumed that the agreement does not have the effect of eliminating or restricting competition. As a result, SAMR will not take any enforcement action unless there is evidence showing the contrary. However, the safe harbor rules do not apply to hard-core conduct such as price fixing or resale price maintenance.

On abuse of dominance, the IP Guidelines acknowledge that just because an undertaking is an intellectual property right holder does not mean that it has a dominant market position. Rather, whether an intellectual property right holder has dominance in the relevant market will depend on the considerations set out in Article 18 of the AML, such as its market shares and the competitive status of the relevant market, as well as three additional factors set out in the IP Guidelines: (1) the possibility and cost of a transaction counterparty switching to an alternative technology or product; (2) the degree of dependence of the downstream markets on the goods provided by the use of the intellectual property rights; and (3) the capacity of a transaction counterparty to constrain the intellectual property right holder. The IP Guidelines further set out five types of conduct that would amount to an abuse: (1) licensing of intellectual property rights at an unfairly high price; (2) refusal to license intellectual property rights; (3) intellectual property-related bundling; (4) unreasonable transaction conditions relating to intellectual property; and (5) discriminatory treatment relating to intellectual property.

Finally, the IP Guidelines note that a filing obligation could be triggered where an undertaking acquires control or decisive influence over another undertaking by reason of a transfer or sole licensing of intellectual property rights. When determining whether a transaction would trigger the filing obligation, SAMR will consider whether the intellectual property constitutes a stand-alone business, whether the intellectual property independently generated calculable turnover in the previous financial year, and the form and duration of the intellectual property license.

Leniency and Commitments: In September and October 2020, SAMR formalized its leniency and commitment regime through the publication of the finalized version of two relevant guidelines: (a) the Guidelines for the Application of Leniency Program in Horizontal Monopoly Agreement Cases (“Leniency Guidelines”)[6] and (b) the Guidelines on Undertakings’ Commitments in Anti-Monopoly Cases (“Commitments Guidelines”).[7] The two Guidelines aim to encourage cooperation of market players to self-report breaches in exchange for immunity from or mitigation of penalties; and to offer commitments to cease anti-competitive conduct in exchange for the suspension or termination of an investigation.

The Leniency Guidelines introduce a new marker system that allows a leniency applicant to hold their place in the leniency queue while perfecting their application. The first applicant may receive up to a 100 percent reduction of fines. However, cartel leaders and undertakings that are found to have coerced others to participate in the cartel are not eligible for full immunity. The second and third applicants may receive up to a 50 and 30 percent reduction of fines, respectively. While the Leniency Guidelines allow for up to three applicants to receive leniency benefits, they also provide that SAMR may grant a reduction of no more than 20 percent to subsequent applicants in complex cases. Moreover, leniency applicants must, among other conditions, admit liability in order to secure the leniency benefits.

The Commitments Guidelines set out a mechanism under which parties under investigation may enter into voluntary commitments to terminate the alleged anti-monopoly conduct and mitigate or eliminate its consequences, in exchange for SAMR suspending and closing the investigation without a finding of breach. Under the Commitments Guidelines, parties are encouraged to discuss commitments with SAMR at any time during the investigation up to the point of SAMR’s issuance of a penalty notice. Moreover, commitments are not available in cartel investigations.

2. Merger Control

In 2020, SAMR reviewed a total of 458 concentrations, which represents only a slight increase from 2019 despite disruptions caused by the COVID-19 pandemic. Out of the 458 concentrations, 454 were approved unconditionally and four were approved subject to conditions. SAMR did not prohibit any transactions in 2020.[8]

SAMR on average took approximately 14 days to complete its review of cases under the simplified procedure, less than in 2019. On the other hand, SAMR took eight to 12 months (and on average 9.5 months) to complete its review of conditionally approved cases. SAMR asked the parties in two out of the four conditionally approved cases to withdraw and refile their applications, whilst completing its review within the review period for the other two cases.

2.1 Conditional Approval Decisions

We highlight below the decisions in which SAMR imposed or removed remedies. Save for Danaher/GE BioPharma, which required structural remedies, SAMR imposed behavioral remedies in all the other conditionally approved cases.

SAMR continued its focus on the technology sector as two out of the four cases which involve conditional approval concern the semiconductor industry. In these two cases, conditions were imposed despite that regulators in other jurisdictions (such as in the EU and in the U.S.) approved the transactions without conditions. It is also noteworthy that three out of the four conditionally approved cases involve the imposition of remedies requiring the merged entitles to comply with fair, reasonable and non-discriminatory (FRAND) terms.

Danaher / GE BioPharma:[9] On February 28, 2020, SAMR approved the acquisition by Danaher of GE BioPharma’s life science business, with conditions imposed in the form of structural remedies. SAMR required Danaher to divest a number of its business segments. A notable feature of this matter is the continuous role that research and development has featured in SAMR’s merger analysis. Danaher had a product in the pipeline that could potentially compete with GE BioPharma and SAMR was concerned that Danaher would, post-transaction, have less incentive to invest in research and development. SAMR imposed a condition that Danaher must provide to the purchaser of its divested businesses research and development resources for this product and remain involved in this product for a period of two years after the deal completes. Danaher must report annually to SAMR.

Infineon / Cypress:[10] On April 8, 2020, SAMR conditionally approved the proposed acquisition of Cypress Semiconductor (a U.S. semiconductor design and manufacturing company) by Infineon Technologies (a German semiconductor supplier). Pursuant to the conditions imposed by SAMR: (i) there must be no tie-in sales or imposition of unreasonable trading terms, (ii) there has to be a guarantee of separate supply of any all-in-one/integrated products (should it become possible to integrate products into a single product) as well as the stand-alone products to Chinese customers, (iii) to ensure interoperability, the products sold to Chinese customers should comply with the commonly accepted industry standards for interface and (iv) the supply of products has to be in compliance with FRAND terms.

Nvidia / Mellanox:[11] On April 16, 2020, SAMR conditionally approved the acquisition by Nvidia (a U.S. supplier of graphics processing units) of Mellanox (an Israeli supplier of semiconductor-based network interconnect products). The conditions imposed included that: (i) there must be no tie-in sales or imposition of unreasonable conditions, and it is prohibited to restrict customers from purchasing stand-alone products or otherwise discriminate against these customers, (ii) the provision of products has to comply with FRAND terms, (iii) interoperability has to be ensured between the relevant products and other third-party products, (iv) there must be open source commitment regarding the software offered and (v) protective measures have to be adopted for confidential information made available by third-party manufacturers.

ZF Friedrichshafen / WABCO:[12] On May 15, 2020, SAMR conditionally approved the acquisition of WABCO (a U.S. supplier of systems for commercial vehicles) by ZF Friedrichshafen (a German supplier of vehicle components and systems). Three conditions were imposed, namely that: (i) there has to be a continuous supply of products under terms no less favorable than the existing terms, (ii) the provision of products has to comply with FRAND terms and (iii) Chinese customers have to be provided with the opportunity to develop products in accordance with FRAND principles.

Corun / PEVE: On April 24, 2020, SAMR waived the remedies imposed back in 2014 in respect of the joint venture concerning Corun, PEVE, Sinogy, and a car manufacturer. The remedies were waived on the basis that there had been material changes in the competitive dynamics of the markets in aspects such as the applicable regulations for the automotive industry, the advancement of technology in respect of lithium batteries and the parties’ decreasing market share.

2.2 Enforcement Against Non-Notified Transactions

In 2020, SAMR published 13 decisions relating to failures to notify transactions, less than in 2018 or 2019. These cases, on average, took 250 days to investigate.

A notable development in this area is that on December 14, 2020, SAMR announced that it has fined three companies in the internet space for completing transactions involving variable interest entity, or VIE, structures without prior notification. In very simple terms, VIE refers to a business structure in which an investor has a controlling interest (but not a majority of voting rights) via contractual arrangements.

These fines confirm that SAMR takes the failure to notify mergers (especially those involving online platforms and/or concerning VIE) seriously. If and when the fines for failures to file are increased, enforcement actions in this space are likely to be more robust and visible.

3. Non-Merger Enforcement

The trend of delegation of enforcement to local antitrust agencies continued from 2019, during which local antitrust regulators were responsible for 15 out of 16 enforcement decisions published in that year. In 2020, SAMR published 22 enforcement decisions (including two decisions to terminate an investigation) involving conduct such as horizontal monopolistic agreements, price fixing and abuse of market dominance. Out of these 22 enforcement decisions, only one was investigated and penalized by SAMR (at the central level).

Enforcement actions were focused on sectors having an impact on the livelihood of the general public, including pharmaceuticals, automobiles, and utilities:

Pharmaceutical Industry: Pharmaceutical companies were penalized in two enforcement decisions, both concerning abusive conduct in the active pharmaceutical ingredient markets. In particular, the investigation by SAMR of three pharmaceutical companies, Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”), and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) for abuse of collective dominance, resulted in record monetary penalty against domestic firms under the AML. SAMR found that the three companies collectively abused their market dominance by selling injectable calcium gluconate at unfairly high prices and imposing unreasonable trading terms on downstream manufacturers. SAMR imposed on Kanghui the maximum penalty rate, being 10 percent of its 2018 sales amount; and imposed on Puyanhui and Yaiyangshen 9 percent and 7 percent of their respective 2018 sales amounts. The total monetary penalty imposed on the three companies was RMB 204.5 million (~USD 31.6 million, and all of their illegal gains in the aggregate amount of RMB 121 million (~USD 18.7 million) were confiscated.[13]

Automobile Industry: The automobile industry accounted for four enforcement decisions in 2020 involving price fixing, market partitioning and abusing a dominant position. Importantly, in one of the enforcement decisions, one of the 11 second-hand vehicle dealers involved in the case, Pingluo County Zhongli Second-hand Vehicle Trading, was not subject to any penalty by reason that it provided important evidence to the Ningxia Administration for Market Regulation. The other offenders in the case received a fine equivalent to 4 percent of their 2018 sales amount, in addition to a confiscation of their illegal gains.[14]

Utilities Sector/Energy: Six enforcement decisions concerned actions taken by local antitrust agencies against utility companies for anti-competitive conduct including exclusive dealing and market partitioning. SAMR continues to take into account the level of cooperation exhibited by an undertaking when imposing penalties in administrative actions. For example, in a case involving an agreement partitioning the market of sale of bottled liquefied gas, one of the two undertakings concerned was exempted from penalty in view of its cooperation during the investigation, including the proactive provision of key evidence to the enforcement agency.[15] The other undertaking was fined with an amount equivalent to 3 percent of its sales in 2018, i.e. around RMB 1.76 million (~USD 272,290).

Similarly, the importance of cooperation is highlighted in the Jiangsu Administration for Market Regulation’s (“Jiangsu AMR”) decision to terminate an investigation against Yancheng Xin’ao Fuel Gas (“Yancheng Xin’ao”) for suspected abuse of dominance. The investigation, which began in 2015, was suspended in 2019 in light of the cooperation of Yancheng Xin’ao in the investigation process and the remedial measures proposed and implemented by it. Upon the applications made by Yancheng Xin’ao and having taken into account the implementation of the remedial measures, Jiangsu AMR decided in July 2020 to terminate the investigation.[16]

Finally, the Qinghai Administration for Market Regulation (“Qinghai AMR”) imposed a monetary penalty in the amount of RMB 700,000 (~USD 108,300) on Qinghai Minhe Chuanzhong Petroleum and Natural Gas (“Qinghai Minhe”) for obstructing the investigation by concealing and destroying evidence. In addition, Qinghai AMR took into account the serious nature and the duration of the breaches, and imposed a hefty fine equivalent to 9 percent of its 2017 sales amount on Qinghai Minhe.[17]

4. Civil Litigation

There continues to be an increasing number of private antitrust litigation covering a wide range of topics and industries. For example, according to the 2020 annual report of China’s Intellectual Property Tribunal, which hears appeals from specialized intellectual property courts, the antitrust cases handled by the tribunal involved various subject matters, including information and communication technologies, pharmaceuticals, power supply, construction, and security products.

Among antitrust cases before the Chinese courts in 2020, of particular interest to the antitrust community is the increasing number of claims against tech companies and development in private litigation following an antitrust regulator’s adverse administrative decision against an undertaking, as summarized below.

4.1 Tech Companies Targeted

Tech companies continue to be the target of private antitrust litigation in 2020, though none of the claimants succeeded in any of the claims against these tech giants. For example, the appeal brought by Huaduo against a leading Chinese internet technology company alleging abuse of market dominance by the latter in relation to a well-known online game at the Higher People’s Court of Guangdong Province was dismissed in May 2020 on the basis that the defendant did not have the market dominance in the relevant market.

It is anticipated that the trend of growing private antitrust litigation against tech companies will continue in 2021. A claim filed by an individual surnamed Wang against Meituan for alleged abuse of dominance by removing Alipay as a payment option was reportedly accepted by the Beijing Intellectual Property Court in late December 2020.[18]

In addition, ByteDance’s Douyin, a video-sharing social network platform, has filed a claim against a Chinese multinational technology conglomerate for alleged monopolistic behavior by blocking users’ sharing of Douyin content on its instant sharing messaging apps. It was also reported that Zhang Zhengxin, who withdrew his claim in January 2020 after the trial against the same conglomerate for abuse of market by disenabling direct sharing of links to Taobao or Douyin through one of its instant sharing messaging apps, indicated earlier this year that he was in the process of filing a claim against the conglomerate afresh on the basis of some evidence he has recently obtained.

4.2 Follow-on Litigation

In 2020, Chinese courts published two decisions in private follow-on litigation after an enforcement action is taken by an antitrust regulator.

In the first case, the Higher People’s Court of Shanghai Municipality (“Shanghai Higher People’s Court”) dismissed Hanyang Guangming’s claim against and Hankook Tire. The court indicated that while materials in an administrative action carried out by an antitrust regulator may be adopted as evidence in court, courts need not admit materials that are irrelevant to the dispute in the private litigation.[19] The claimant argued that the administrative decision by the Shanghai Municipal Price Bureau in 2016 to penalize Hankook Tire found that the latter reached and implemented resale price maintenance agreements, and that this administrative decision could be used as the basis to prove facts in the private litigation. The claimant also argued that the lower court erred in coming to a conclusion that contradicted the Shanghai Municipal Price Bureau’s administrative decision. The Shanghai Higher People’s Court disagreed with the claimant, and upheld the lower court’s determination that the actions of Hankook Tire did not constitute resale price maintenance agreements as prohibited by the AML. This case demonstrates that courts do not always follow determinations made by an antitrust regulator, rendering it less predictable and more difficult for claimants to succeed in private follow-on litigation.

On the other hand, the court in the second private follow-on litigation came to the same conclusion as the antitrust enforcement agency against the defendant. In this case, the defendant, Jiacheng Concrete, received an administrative penalty from the Shaanxi Administration for Market Regulation (“Shaanxi AMR”) for its monopolistic conduct. In reliance on the administrative decision by the Shaanxi AMR against Jiacheng Concrete, the Higher People’s Court of Shaanxi Province ruled in favor of the claimant in the absence of any contrary evidence, despite the fact that the administration decision was not subject to any review or appeal.[20]

_____________________

[1] Gibson Dunn, “Antitrust in China – 2019 Year in Review” (released on February 10, 2020), available at https://www.gibsondunn.com/antitrust-in-china-2019-year-in-review/. The amendments are still under discussion.

[2] SAMR, “Anti-Monopoly Guidelines for the Automobile Sector” (关于汽车业的反垄断指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321860.html.

[3] SAMR, “Anti-Monopoly Guidelines for the Platform Economy Sector” (关于平台经济领域的反垄断指南) (released on February 7, 2021), available at http://gkml.samr.gov.cn/nsjg/fldj/202102/t20210207_325967.html.

[4] The Establishment of a Joint Venture between Shanghai Mingcha Zhegang Management Consulting Co., Ltd. and Huansheng Information Technology (Shanghai) Co., Ltd, see announcement concerning the filing in April 2020 at http://www.samr.gov.cn/fldj/ajgs/jzjyajgs/202004/t20200420_314431.html and announcement concerning the unconditional approval in July 2020 at http://www.samr.gov.cn/fldj/ajgs/wtjjzajgs/202007/t20200722_320099.html.

[5] SAMR, “Anti-Monopoly Guidelines in the Field of Intellectual Property Rights” (关于知识产权领域的反垄断指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321857.html.

[6] SAMR, “Guidelines for the Application of Leniency Program in Horizontal Monopoly Agreement Cases” (横向垄断协议案件宽大制度适用指南) (released on September 18, 2020), available at http://gkml.samr.gov.cn/nsjg/fldj/202009/t20200918_321856.html.

[7] SAMR, “Guidelines on Undertakings’ Commitments in Anti-Monopoly Cases” (反垄断案件经营者承诺指南) (released on October 30, 2020), available at http://gkml.samr.gov.cn/nsjg/xwxcs/202010/t20201030_322782.html.

[8] SAMR, “Announcements of Unconditionally Approved Cases on Undertaking Concentrations” (无条件批准经营者集中案件公示), available at http://www.samr.gov.cn/fldj/ajgs/wtjjzajgs/.

[9] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve the Acquisition of the BioPharma Business of the General Electric Company by Danaher Corporation” (市场监管总局关于附加限制性条件批准丹纳赫公司收购通用电气医疗生命科学生物制药业务案反垄断审查决定的公告) (released on February 28, 2020), available at, http://www.samr.gov.cn/fldj/tzgg/ftjpz/202002/t20200228_312297.html.

[10] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve Infineon Technologies AG’s Share Acquisition of Cypress Semiconductor Corp.” (市场监管总局关于附加限制性条件批准英飞凌科技公司收购赛普拉斯半导体公司股权案反垄断审查决定的公告) (released on April 8, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202004/t20200408_313950.html.

[11] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve Nvidia Corporation’s Share Acquisition of Mellanox Technologies, Ltd.” (市场监管总局关于附加限制性条件批准英伟达公司收购迈络思科技有限公司股权案反垄断审查决定的公告) (released April 16, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202004/t20200416_314327.html.

[12] SAMR, “Announcement of SAMR’s Antimonopoly Review Decision to Conditionally Approve ZF Friedrichshafen AG’s Share Acquisition of WABCO Holding Inc.” (市场监管总局关于附加限制性条件批准采埃孚股份公司收购威伯科控股公司股权案反垄断审查决定的公告) (released on May 15, 2020), available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/202005/t20200515_315255.html.

[13] SAMR, “Announcement of SAMR of the Decision to Penalize concerning Monopoly involving Calcium Gluconate Pharmaceutical Ingredients” (市场监管总局发布葡萄糖酸钙原料药垄断案行政处罚决定书) (released April 14, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202004/t20200414_314227.html.

[14] SAMR, “Announcement of SAMR of the Decision concerning the Monopoly Agreement of 11 Second-hand Vehicles Dealers in Ningxia Shizuishan Shi” (市场监管总局发布宁夏石嘴山市11家二手车交易市场经营者垄断协议案的处理决定) (released on October 22, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202010/t20201022_322556.html.

[15] SAMR, “Announcement of SAMR of the Decision to Penalize Huan Fuel Gas LLC and Huaihua Railway Economic and Technological Development Co. Ltd for Concluding and Implementing Monopoly Agreement” (市场监管总局发布湖南中民燃气有限公司与怀化铁路经济技术开发有限公司达成并实施垄断协议案行政处罚决定) (released on July 2, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202007/t20200702_319339.html.

[16] SAMR, “Announcement of SAMR of the Decision to Terminate Investigation against Yancheng Xin’ao Fuel Gas Ltd” (市场监管总局发布盐城新奥燃气有限公司垄断案终止调查决定书) (released on July 24, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202007/t20200724_320227.html.

[17] SAMR, “Announcement of SAMR of the Decision to Penalize Qinghai Minhe Chuanzhong Petroleum and Natural Gas Co., Ltd. for Abusing Market Dominance” (市场监管总局发布青海省民和川中石油天然气有限责任公司滥用市场支配地位案行政处罚决定书) (released on May 19, 2020), available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202005/t20200519_315357.html.

[18] China Daily, Meituan in the antitrust dock (December 31, 2020), available at https://www.chinadaily.com.cn/a/202012/31/WS5fed065ca31024ad0ba9fab1.html.

[19] Wuhan Hanyang Guangming Trading Company Limited v Shanghai Hankook Tire Sales Company Limited (Higher People’s Court of Shanghai Municipality, July 30, 2020), available here.

[20] Yanan Jiacheng Concrete Company Limited v Fujian Sanjian Engineering Company Limited (Higher People’s Court of Shanghai Municipality, August 13, 2020), available here.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard, Bonnie Tong, Rebecca Ho and Celine Leung.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)
Bonnie Tong (+852 2214 3762, btong@gibsondunn.com)
Rebecca Ho (+852 2214 3824, rho@gibsondunn.com)
Celine Leung (+852 2214 3823, cleung@gibsondunn.com)

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2020 was a uniquely uncertain and perilous year. Within the world of international trade, the steady increase in the use of sanctions and export controls—principally by the United States but also by jurisdictions around the world—proved to be a rare constant. In each of the last four years, our annual year-end Updates have chronicled a sharp rise in the use of sanctions promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), as well as growing economic tensions between the United States and other major world powers. In the final tally, OFAC during President Donald Trump’s single term sanctioned more entities than it had under two-term President George W. Bush and almost as many as two-term President Barack Obama.

The raw numbers understate the story, as the Trump administration focused sanctions authorities on larger and more systemically important players in the global economy than ever before, and also brought to bear other coercive economic measures—including export controls, import restrictions, foreign investment reviews, tariffs, and novel measures like proposed bans on Chinese mobile apps and restrictions on U.S. persons’ ability to invest in securities of certain companies with alleged ties to the Chinese military. The pace and frequency of these actions intensified in the Trump administration’s final days—an ostensible attempt to force the hand of the incoming Biden-Harris administration on a number of key national security policy decisions.

2020 Year-End Sanctions and Export Controls Update - Chart 1

2020 Year-End Sanctions and Export Controls Update - Chart 2

China takes top billing in this year’s Update, as long-simmering tensions between Beijing and Washington seemingly reached a boil. Despite a promising start to the year with the January 2020 announcement of a “phase one” trade agreement between the world’s two largest economies, relations between the two powers rapidly deteriorated amidst recriminations concerning the pandemic, a crackdown in Hong Kong, a heated U.S. presidential election, and a deepening struggle for economic, technological, and military primacy. The Chinese government on January 9, 2021 responded to the Trump administration’s barrage of trade restrictions by issuing the first sanctions blocking regime in China to counteract the impact of foreign sanctions on Chinese firms. Although the law—which borrows from a similar measure adopted by the European Union—is effective immediately, it currently only establishes a legal framework. The Chinese blocking statute will become enforceable once the Chinese government identifies the specific extra-territorial measures—likely sanctions and export controls the United States has levied against Chinese companies—to which it will then apply. While experts have long predicted the rise of a technological Cold War with Chinese 5G and Western 5G competing for dominance—the advent of China’s blocking statute (amid threats of additional counter-measures) suggests the emergence of a regulatory Cold War as well. Major multinational companies may be forced to choose between the two powers.

The pandemic and Sino-American tensions almost over-shadowed what would have been the principal trade story of the year: nearly four-and-a-half years after the United Kingdom voted to leave the European Union, London and Brussels finally completed Brexit. On December 30, 2020—one day prior to the end of the Brexit Transition period—the EU and China concluded negotiations, over the objections of the incoming U.S. administration, for a comprehensive agreement on investment focused on enabling an increase in outbound investment in China from the EU.

At year’s end, China, France, Germany, Russia, the United Kingdom, and the High Representative of the European Union for Foreign Affairs and Security Policy stressed the importance of the 2015 Joint Comprehensive Plan of Action (“JCPOA”), while the Trump administration sought to impose additional sanctions on Tehran that will make it more difficult for the Biden-Harris administration to reenter the agreement.

In the coming months, the Biden-Harris administration has promised a fulsome review of U.S. trade measures with a view to finding ways of providing possible relief to help with the global response to the coronavirus pandemic. And although we expect a more measured approach to diplomatic relations under the new administration, U.S. sanctions and export controls will continue to play a dominant role in U.S. foreign policy—and an increasingly dominant role in foreign policy strategies of America’s friends and competitors. The increasing complexity of these measures in the United States—with “sanctions” authorities increasingly split between the U.S. Treasury Department, the Department of Commerce, the Department of State, the Department of Homeland Security, and even the Department of Defense—makes for increasing challenges for parties seeking to successfully comply while managing their businesses.

1. U.S.-China Relationship

A.    Protecting Communications Networks and Sensitive Personal Data
B.    TikTok and WeChat Prohibitions and Emerging Jurisprudence Limiting Certain Executive Authorities
C.    Slowing the Advance of China’s Military Capabilities
D.    Promoting Human Rights in Hong Kong
E.    Promoting Human Rights in Xinjiang
F.    Trade Imbalances and Tariffs
G.    China’s Counter-Sanctions – The Chinese Blocking Statute
H.    New Chinese Export Control Regime

II. U.S. Sanctions Program Developments

A.    Iran
B.    Venezuela
C.    Cuba
D.    Russia
E.    North Korea
F.    Syria
G.    Other Sanctions Developments

III. U.S. Export Controls

A. Commerce Department
B. State Department

IV. European Union

A.    EU-China Relationship
B.    EU Sanctions Developments
C.    EU Member State Export Controls
D.    EU Counter-Sanctions

V. United Kingdom Sanctions and Export Controls

A. Sanctions Developments
B. Export Controls Developments

_______________________________

I. U.S.-China Relationship

The dozens of new China-related trade restrictions announced in 2020 were generally calculated to advance a handful of longstanding U.S. policy interests for which there is broad, bipartisan support within the United States, namely protecting U.S. communications networks, intellectual property, and sensitive personal data; slowing the advance of China’s military capabilities; promoting human rights in Hong Kong and Xinjiang; and narrowing the trade deficit between Washington and Beijing. As such, while the new Biden-Harris administration promises a shift in tone—including greater coordination with traditional U.S. allies and a more orderly and strategic policymaking process—the core objectives of U.S. trade policy toward China are unlikely to change, at least in the near term. Given the emerging consensus in Washington in favor of a tough stance against China, we anticipate that President Biden will continue to pressure China over its human rights record and will be disinclined to relax Trump-era measures targeting Chinese-made goods and technology without first extracting concessions from Beijing.

Meanwhile, China shows few signs of backing down in the face of U.S. pressure. As we wrote here, in January 2021 China’s Ministry of Commerce unveiled long-anticipated counter-sanctions prohibiting Chinese citizens and companies from complying with “unjustified” foreign trade restrictions, which could soon force multinational firms into an unpalatable choice between complying with U.S. or Chinese regulations. How vigorously and selectively the Chinese authorities enforce these new counter-sanctions remains to be seen and will help set the tone for the future of U.S.-China trade relations and the challenges multinational corporations will have in navigating between the two powers.

A. Protecting Communications Networks and Sensitive Personal Data

Spurred by concerns about Chinese espionage and trade secret theft, the United States during 2020 imposed a variety of trade restrictions designed to protect U.S. communications networks and sensitive personal data by targeting globally significant Chinese technology firms like Huawei and popular mobile apps like TikTok and WeChat.

During 2020, the Trump administration continued its diplomatic, intelligence-sharing, and economic pressure campaign to dissuade countries from partnering with Huawei and other Chinese telecommunications providers in the development and deployment of fifth-generation (“5G”) wireless networks. The rollout of 5G networks—long viewed as a key battleground in the U.S.-China tech war—is about more than faster smartphones, as 5G networks are expected to support advanced technology like autonomous vehicles and to catalyze innovation across the economy from manufacturing to the military. As Huawei has emerged as a leader in 5G infrastructure, the U.S. government has increasingly raised alarms that the company’s technology may be vulnerable to Chinese government espionage. Some U.S. allies have taken steps to block Huawei’s involvement in their own domestic 5G networks. Australia blacklisted Huawei from its 5G network in August 2018, and the British government announced in July 2020 that it would ban the purchase of new Huawei equipment and would remove Huawei gear already installed from its networks by 2027, marking a reversal from a prior decision in January 2020. Other European allies, however, have resisted an outright ban, with Germany signaling in December 2020 that it could allow Huawei’s continued involvement subject to certain assurances.

The Trump administration also continued to tighten the screws on Huawei along several other fronts, with the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) adding another 38 non-U.S. affiliates of Huawei to the Entity List in August 2020. Since first adding Huawei in May 2019 citing national security concerns, the Trump administration has added over 150 Huawei affiliates to the Entity List, significantly limiting Huawei’s ability to source products from the United States and U.S. companies. These actions highlight the administration’s sustained focus on Huawei, but also reflect a broader trend in the increasingly expansive use of the Entity List against Chinese firms. In its expanding size, scope, and profile, the Entity List has begun to rival the more traditional OFAC Specially Designated Nationals (“SDN”) and Blocked Persons List as a tool of first resort when U.S. policymakers seek to wield coercive authority especially against major economies and significant economic actors.

On May 15, 2020, BIS announced a new rule to further restrict Huawei’s access to U.S. technology. The complicated rule amends the “Direct Product Rule” (discussed below) and the Entity List to restrict Huawei’s ability to share its semiconductor designs or rely on foreign foundries to manufacture semiconductors using U.S. software and technology. Although multiple rounds of Entity List designations targeting Huawei entities had already effectively cut off the company’s access to exports of most U.S.-origin products and technology, BIS claimed that Huawei had responded to the designations by moving more of its supply chain outside the United States. However, for the time being, Huawei and many of the foreign chip manufacturers that Huawei uses, still depend on U.S. equipment, software, and technology to design and produce Huawei chipsets.

BIS’s May 2020 Direct Product Rule amendment expanded one of the bases on which the U.S. can claim jurisdiction over items produced outside of the United States. Generally, under the EAR, the United States claims jurisdiction over items that are (1) U.S. origin, (2) foreign-made items that are being exported from the United States, (3) foreign-made items that incorporate more than a minimal amount of controlled U.S.-origin content, and (4) foreign-made “direct products” of certain controlled U.S.-origin software and technology. Under the fourth basis of jurisdiction, also known as the Direct Product Rule, foreign-made items are subject to U.S. Export Administration Regulation (“EAR”) controls if they are the direct product of certain U.S.-origin technology or software or are the direct product of a plant or major component of a plant located outside the United States, where the plant or major component of a plant itself is a direct product of certain U.S.-origin software and technology.

BIS’s new rule allows for the application of a tailored version of the Direct Product Rule to parties identified on its Entity List, with a bespoke list of controlled software and technology commonly used by foreign manufacturers to design and manufacture telecommunications and other kinds of integrated circuits for Huawei. Specifically, the rule makes the following non-U.S.-origin items subject to the restrictions of U.S. export controls:

Items, such as chip designs, that Huawei and its affiliates on the Entity List produce by using certain U.S.-origin software or technology that is subject to the EAR; and
Items, such as chipsets, made by manufacturers from Huawei-provided design specifications, if those manufacturers are using semiconductor manufacturing equipment that itself is a direct product of certain U.S.-origin software or technology subject to the EAR.

By subjecting these items to a new licensing requirement, BIS can block the sale of many semiconductors manufactured by a number of non-U.S.-based manufacturers that Huawei uses across its telecom equipment and smartphone business lines.

While Huawei has been a focal point of U.S. trade policy over the past several years, U.S. government concerns about maintaining the integrity of its communications networks and U.S. residents’ sensitive personal data extend more broadly across China’s tech sector. On May 15, 2019, acting under the authorities provided by the International Emergency Economic Powers Act (“IEEPA”)—the statutory basis for most U.S. sanctions programs—President Trump issued Executive Order 13873, which declared a national emergency with respect to the exploitation of vulnerabilities in information and communications technology and services (“ICTS”) by foreign adversaries, and authorized the Secretary of Commerce to prohibit transactions involving ICTS designed, developed, manufactured, or supplied by persons owned, controlled, or subject to the jurisdiction of a foreign adversary that pose an undue or unacceptable risk to U.S. critical infrastructure, the U.S. digital economy, national security, or the safety of U.S. persons.

On January 19, 2021, the Commerce Department published an Interim Final Rule clarifying the processes and procedures that the Secretary of Commerce will use to evaluate ICTS transactions covered by Executive Order 13873. The Interim Final Rule identified six foreign adversaries: China (including Hong Kong), Cuba, Iran, North Korea, Russia, and Venezuela’s President Nicolás Maduro; though this list can be revised as necessary. The Interim Final Rule also identified broad categories of ICTS transactions that fall within its scope, and announced that the Commerce Department will establish a licensing process for entities to seek pre-approval of ICTS transactions. Unless the Biden-Harris administration acts to delay the measure, the Interim Final Rule is scheduled to take effect on March 22, 2021.

B. TikTok and WeChat Prohibitions and Emerging Jurisprudence Limiting Certain Executive Authorities

To address the national emergency declared in the ICTS order, President Trump on August 6, 2020 issued two further Executive Orders restricting U.S. persons from dealing with the Chinese social media platforms TikTok and WeChat. The orders sought to prohibit or restrict certain categories of transactions—subsequently to be defined by the U.S. Secretary of Commerce—involving TikTok’s corporate parent ByteDance and WeChat’s corporate parent Tencent Holdings Ltd. by September 20, 2020.

Pursuant to these Executive Orders, the Commerce Department on September 18, 2020 issued a broad set of prohibitions that would have essentially banned the use or download of the TikTok and WeChat apps in the United States. The following day, a California federal district court granted a nationwide preliminary injunction halting the WeChat ban on First Amendment grounds. The plaintiffs, a group of WeChat users, successfully argued that WeChat functions as a “public square” for the Chinese-American community in the United States and that the restrictions imposed by the Commerce Department infringed upon their First Amendment rights.

One week later, a Washington D.C. federal district court granted a similar injunction with respect to the TikTok ban, finding that content exchanged by users on TikTok constitutes “information and informational materials” protected by the Berman Amendment, a statutory provision within IEEPA that aims to safeguard the free flow of information. The court further found that, by virtue of being primarily a conduit of such informational materials, the platform itself was protected by the Berman Amendment. On October 30, 2020, a Pennsylvania federal district court granted a second, nationwide preliminary injunction halting the TikTok ban on Berman Amendment grounds. On December 7, 2020, the D.C. district court found that the Trump administration had overstepped its authority under IEEPA by failing to adequately consider “an obvious and reasonable alternative” to an outright ban. Together these opinions have clarified and expanded case law regarding the limits of the President’s authority under IEEPA.

The litigation over the Commerce Department’s TikTok and WeChat bans upended a parallel effort by the U.S. Committee on Foreign Investment in the United States (“CFIUS”)—the interagency committee tasked with reviewing the national security risks associated with foreign investments in U.S. companies—to force a divestiture of TikTok’s U.S. operations. In 2019, CFIUS initiated a review of ByteDance’s 2017 acquisition of the U.S. video-sharing platform Musical.ly in response to growing concerns regarding the use of data and censorship directed by the Chinese government. The CFIUS review culminated in an August 14, 2020 order directing ByteDance to divest its interest in TikTok’s U.S. platform by November 12, 2020.

The Commerce restrictions and ensuing litigation threatened to derail CFIUS negotiations over the TikTok divestment—a matter made more challenging on August 28, 2020, when China retaliated with its own set of export controls requiring Chinese government approval for such a transaction. Although the U.S. Department of the Treasury announced an agreement in principle for the sale of TikTok on September 19, 2020, a final agreement proved elusive. Negotiations ground to a halt around the time of the U.S. presidential election, and CFIUS extended the deadline for a resolution three times by the end of the year before defaulting to a de facto continuation as the parties continue to negotiate.

None of these developments, however, appeared to dampen the Trump administration’s drive to target leading Chinese technology companies. On January 5, 2021, President Trump issued another Executive Order requiring the Commerce Department to issue a more narrowly tailored set of prohibitions with respect to the Chinese mobile payment apps WeChat Pay, Alipay, QQ Wallet, as well as CamScanner, SHAREit, Tencent QQ, VMate, and WPS Office within 45 days (by February 19, 2021). Given the timing of the order, the Biden-Harris administration will ultimately be responsible for either implementing or revoking the ban, setting up an early test case for the Biden-Harris administration with respect to Trump-era restrictions on Chinese tech companies.

C. Slowing the Advance of China’s Military Capabilities

Another key goal of the Trump administration’s trade policy in 2020 was its attempt to blunt the development of China’s military capabilities, including by restricting exports to Chinese military end uses and end users, adding military-linked firms to the Entity List, prohibiting U.S. persons from investing in the securities of dozens of “communist Chinese military companies,” and proposing new rules that seek to eject Chinese firms from U.S. stock exchanges for failure to comply with U.S. auditing standards.

Over the past year, the Trump administration has heavily relied on export controls to deny Beijing access to even seemingly low-end U.S. technologies that might be used to modernize China’s military. Pursuant to the Military End Use / User Rule, exporters of certain listed items subject to the EAR require a license from BIS to provide such items to China, Russia, or Venezuela, if the exporter knows or has reason to know that the exported items are intended for a “military end use” or “military end user.” In April 2020, BIS announced significant changes to these military end use and end user controls that became effective on June 29, 2020. Notably, the new rules (1) expanded the scope of military end uses subject to control, (2) added a new license requirement for exports to Chinese military end users, (3) expanded the list of covered items, and (4) broadened the reporting requirement for exports to China, Russia, and Venezuela. These changes appear to have been animated by concerns among U.S. policymakers that the targeted countries are each pursuing a policy of “military-civil fusion” that blurs the line between civilian and military technological development and applications of sensitive technologies.

In particular, where the prior formulation of the Military End Use / User Rule only captured items exported for the purpose of using, developing, or producing military items, the rule now covers items that merely “support or contribute to” those functions. The scope of “military end uses” subject to control was also expanded to include the operation, installation, maintenance, repair, overhaul, or refurbishing of military items. For a more comprehensive discussion of the new Military End Use / User Rule, please see our client alert on the subject, as well as our 2020 Mid-Year Sanctions and Export Controls Update.

The expanded Military End Use / User Rule has presented a host of compliance challenges for industry, prompting BIS in June 2020 to release a detailed set of frequently asked questions (“FAQs”) addressing potential ambiguities in the rule and in December 2020 to publish a new, non-exhaustive Military End User List to help exporters determine which organizations are considered military end users. The more than 100 Chinese and Russian companies identified to date appear to be principally involved in the aerospace, aviation, and materials processing industries, which is consistent with the newly added categories of items covered under the rule. BIS has also continued to add new companies to the Military End User List.

Meanwhile, reflecting the recent significant expansion of the bases for additions to the Entity List, the U.S. Department of Commerce during 2020 announced three batches of Entity List designations tied to activities in support of China’s military. Among those designated in June, August and December 2020 were more than 50 governmental and commercial organizations accused of procuring items for Chinese military end users, building artificial islands in the South China Sea, and supporting China’s policy of “military-civil fusion”—including substantial enterprises like the Chinese chipmaker Semiconductor Manufacturing International Corporation (“SMIC”). Such military-related designations have continued into January 2021 with the addition to the Entity List of China National Offshore Oil Corporation (“CNOOC”) for its activities in the South China Sea, suggesting that the Entity List remains an attractive option for U.S. officials looking to impose meaningful costs on large non-U.S. firms that act contrary to U.S. interests while avoiding the economic disruption of designating such enterprises to OFAC’s SDN List.

In addition to using export controls to deny the Chinese military access to sensitive technology, during 2020 the Trump administration and Congress deployed several other types of measures to deny the Chinese military, and the firms that support it, access to U.S. capital. On November 12, 2020, the Trump administration issued Executive Order 13959, which sought to prohibit U.S. persons from purchasing securities of certain Communist Chinese military companies (“CCMCs”)—ostensibly civil companies that the U.S. Department of Defense alleges have ties to the Chinese military, intelligence, and security services, including enterprises with substantial economic footprints in the United States such as Hikvision and Huawei. A fuller description of the Order and its implications can be found in our November 2020 client alert.

As amended and interpreted to date by OFAC (which has been tasked with implementing and enforcing the Order), Executive Order 13959 seeks to prohibit U.S. persons from engaging in any transaction in publicly traded securities or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any CCMC. The Order covers a wide range financial instruments linked to such companies, including derivatives (e.g., futures, options, swaps), warrants, American depositary receipts, global depositary receipts, exchange-traded funds, index funds, and mutual funds.

OFAC has published a list of the targeted CCMCs, providing additional identifying information about the CCMCs. U.S. persons holding covered securities of CCMCs identified in the initial Annex of Executive Order 13959 must sell or otherwise dispose of those securities by the expiration of a wind-down period on November 11, 2021. As such, the new Biden-Harris administration has a period of time to review the prohibitions and propose further modifications.

In the months since it was issued, Executive Order 13959 has generated widespread confusion within the regulated community concerning what activities are (and are not) prohibited, prompting index providers to sever ties with named Chinese companies and a major U.S. stock exchange to reverse course multiple times on whether such companies should be de-listed. Indeed, despite a flurry of guidance from OFAC, there remains considerable uncertainty concerning which companies are covered by the Order, including how the restriction applies to companies whose names “closely match” firms identified by the U.S. government, as well as such companies’ subsidiaries. In seeming recognition of the compliance concerns expressed by industry, OFAC has issued a general license delaying the Order’s effective date with respect to entities with “closely matching” names of parties explicitly listed until May 2021.

Whatever comes of the Trump administration’s restrictions on investments in CCMCs, there remains broad bipartisan support in Congress for denying Chinese firms access to U.S. capital markets. In December 2020, Congress unanimously passed and President Trump signed into law the Holding Foreign Companies Accountable Act, which requires foreign companies listed on any U.S. stock exchange to comply with U.S. auditing standards or risk being de-listed within three years. Although formally applicable to companies from any foreign country, the Act appears to be principally aimed at Chinese firms, many of which have historically declined to comply with U.S. auditing standards, citing national security and state-secrets concerns. Whether the threat of de-listing Chinese firms materializes will depend in part on how the Act is implemented by the U.S. Securities and Exchange Commission. However, the measure’s approval by Congress without a single dissenting vote suggests that there is likely to be continuing support among U.S. policymakers for limiting Beijing’s access to U.S. investors and capital.

D. Promoting Human Rights in Hong Kong

In connection with China’s crackdown on protests in Hong Kong and the June 2020 enactment of China’s new Hong Kong national security law—which criminalizes dissent through vague offenses such as secession, subversion, terrorism, and collusion with a foreign power—the United States moved to impose consequences on Beijing for undermining freedoms enshrined in the 1984 Sino-British Joint Declaration and Hong Kong’s Basic Law. However, such U.S. measures have so far been limited in scope and have principally involved revoking Hong Kong’s special trading status and imposing sanctions on several senior Hong Kong and mainland Chinese government officials. No governmental entity within the Special Administrative Region (“SAR”) of Hong Kong has yet been sanctioned.

Under U.S. law, the Secretary of State must periodically certify that Hong Kong retains a “high degree of autonomy” from mainland China in order for the territory to continue receiving preferential treatment—including lower tariffs, looser export controls, and relaxed visa requirements—compared to the rest of China. On May 28, 2020, Secretary of State Mike Pompeo reported to the U.S. Congress that Hong Kong is no longer sufficiently autonomous to warrant such preferential treatment. Shortly thereafter, President Trump on July 14, 2020 issued Executive Order 13936 formally revoking Hong Kong’s special trading status and signed into law the Hong Kong Autonomy Act (“HKAA”), which authorizes the President to impose sanctions such as asset freezes and visa bans on individuals and entities that enforce the new Hong Kong national security law. The HKAA also authorizes “secondary” sanctions on non-U.S. financial institutions that knowingly conduct significant transactions with persons that enforce the Hong Kong national security law—potentially subjecting non-U.S. banks that engage in such dealings to a range of consequences, including loss of access to the U.S. financial system.

With that policy framework in place, various arms of the U.S. government soon implemented more targeted measures designed to hold Hong Kong’s leadership accountable and to conform Hong Kong’s legal status with the rest of China.

Notably, on August 7, 2020, OFAC designated to the SDN List 11 senior Hong Kong and mainland Chinese government officials—including Hong Kong’s chief executive, Carrie Lam—for their involvement in implementing the national security law. As a result of this action, U.S. persons (as well as non-U.S. persons when engaging in a transaction with a U.S. touchpoint) are, except as authorized by OFAC, generally prohibited from engaging in transactions involving these 11 individuals and their property and interests in property. Although OFAC has clarified in published guidance that the prohibition does not extend to routine dealings with the non-sanctioned government agencies that these individuals lead, U.S. persons should take care not to enter into contracts signed by, or negotiate with, government officials who are SDNs, activities which could trigger U.S. sanctions.

Meanwhile, the U.S. Department of Commerce in June 2020 suspended the availability of certain export license exceptions that treated Hong Kong more favorably than mainland China. As a result of this suspension—which appears to have been driven by concerns among U.S. policymakers that sensitive goods, software, and technology exported to Hong Kong could be diverted to the mainland—exports, reexports, or transfers to or within Hong Kong of items subject to the EAR may now require a specific license from the U.S. government. Further cementing this shift in U.S. policy, the U.S. Department of Commerce in December 2020 removed Hong Kong as a separate destination on the Commerce Country Chart, effectively ending Hong Kong’s preferential treatment for purposes of U.S. export controls.

While the implementation of tougher sanctions and export controls represents an escalation of U.S. pressure on the Chinese government, the Trump administration during its final year in office shied away from imposing more draconian measures with respect to Hong Kong. For example, the United States has to date refrained from targeting non-U.S. banks, the Hong Kong SAR government, or acted to undermine the longstanding peg that has linked the Hong Kong Dollar and the U.S. Dollar—likely out of concern for the heavy collateral consequences that such measures could inflict on Hong Kong’s pro-Western population, as well as on the many U.S. and multinational firms with operations in the city.

In our assessment, such severe measures—which could undermine Hong Kong’s historic role as a global financial hub—are unlikely to be imposed by the Biden-Harris administration absent significant further deterioration in relations between Washington and Beijing. Instead, particularly in light of reports of a wave of arrests in January 2021 pursuant to the Hong Kong national security law, the Biden-Harris administration could designate additional Chinese and Hong Kong government officials for their role in eroding Hong Kong’s autonomy. A further option available to President Biden could involve easing the path for Hong Kong residents to immigrate to the United States (in line with similar proposals mooted by the U.K. government)—which would both shield such individuals from repression and impose costs on Beijing by draining away some of Hong Kong’s considerable human capital.

E. Promoting Human Rights in Xinjiang

During 2020, the United States ramped up legislative and regulatory efforts to address and punish reported human rights abuses in China’s Xinjiang Uyghur Autonomous Region (“Xinjiang”). Although concerns about high-tech surveillance and harsh security measures against Muslim minority groups date back over a decade, the latest reports estimate that up to 1.5 million Uyghurs, Kazakhs, and other Turkic minorities have been detained in “reeducation camps” and that many others, including former detainees, have been forced into involuntary labor in textile, apparel, and other labor-intensive industries.

In response to these developments, President Trump on June 17, 2020 signed into law the Uyghur Human Rights Policy Act of 2020. The Act required the President to submit within 180 days a report to Congress—which as of this writing has yet to be issued—that identifies foreign persons, including Chinese government officials, who are responsible for flagrant human rights violations in Xinjiang. The Act authorizes the President to impose sanctions (including asset freezes and visa bans) on persons identified therein, and directs the Department of State, the Director of National Intelligence, and the Federal Bureau of Investigation to submit reports to Congress on human rights abuses, and the national security and economic implications of the PRC’s actions, in Xinjiang.

The Trump administration also took a number of executive actions against Chinese individuals and entities implicated in the alleged Xinjiang repression campaign. On July 9, 2020, OFAC designated to the SDN List the Xinjiang Public Security Bureau and four current or former Chinese government officials for their ties to mass detention programs and other abuses. On July 31, 2020, OFAC followed up on this action by sanctioning the Xinjiang Production and Construction Corps (“XPCC”)—a state-owned paramilitary organization and one of the region’s most economically consequential actors—plus two further government officials.

In tandem with sanctions designations, the United States during 2020 leveraged export controls to advance the U.S. policy interest in curtailing human rights abuses in Xinjiang—most notably through expanded use of the Entity List. As discussed in our 2020 Mid-Year Sanctions and Export Controls Update, BIS has over the past year continued to use its powerful Entity List designation tool to effectively ban U.S. exports to entities implicated by the interagency End-User Review Committee (“ERC”) in certain human rights violations.

While the ERC has long had the power to designate companies and other organizations for acting contrary to U.S. national security and foreign policy interests, these interests historically have been focused on regional stability, counterproliferation, and anti-terrorism concerns, plus violations of U.S. sanctions and export controls. Beginning in October 2019, however, the ERC added human rights to this list of concerns, focusing especially on human rights violations occurring in Xinjiang and directed against Uyghurs, Kazakhs, and other members of Muslim minority groups in China. Accelerating this trend, the ERC on three separate occasions this past year—including in June, July, and December 2020—added a total of 24 Chinese organizations to the Entity List for their conduct in Xinjiang. Among the entities targeted were Chinese firms that enable high-tech repression by producing video surveillance equipment and facial recognition software, as well as Chinese companies that benefit from forced labor in Xinjiang such as manufacturers of textiles and electronic components. In addition to denying these entities access to controlled U.S.-origin items, these designations also spotlight sectors of the Chinese economy that are likely to remain subject to regulatory scrutiny under the Biden-Harris administration and which may call for enhanced due diligence by U.S. companies that continue to engage with Xinjiang.

Consistent with the Trump administration’s whole-of-government approach to trade with China, the United States also used import restrictions—including a record number of withhold release orders issued by U.S. Customs and Border Protection (“CBP”)—to deny certain goods produced in Xinjiang access to the U.S. market.

CBP is authorized to enforce Section 307 of the Tariff Act of 1930, which prohibits the importation of foreign goods produced with forced or child labor. Upon determining that there is information that reasonably, but not conclusively, indicates that goods that are being, or are likely to be, imported into the United States may be produced with forced or child labor, CBP may issue a withhold release order, which requires the detention of such goods at any U.S. port. Historically, this policy tool was seldom used until the latter half of the Obama administration.

During 2020, CBP ramped up its use of this policy instrument, issuing 15 withhold release orders—the most in any single year for at least half a century. Of those orders, nine were focused on Xinjiang, including import restrictions on hair products and garments produced by certain manufacturers, as well as cotton and cotton products produced by XPCC, the Chinese paramilitary organization sanctioned by OFAC. On January 13, 2021, the Trump administration went further and imposed a withhold release order targeting all cotton products and tomato products originating from Xinjiang. Taken together, these developments suggest that the U.S. government is likely to continue its aggressive use of import restrictions against goods sourced from Xinjiang, further heightening the need for importers to scrutinize suppliers with ties to the region in order to minimize the risk of supply chain disruptions and reputational harm.

As a complement to the regulatory changes described above, the Trump administration during 2020 published multiple rounds of guidance to assist the business community in conducting human rights diligence related to Xinjiang. On July 1, 2020, the U.S. Departments of State, Treasury, Commerce, and Homeland Security issued the Xinjiang Supply Chain Business Advisory, a detailed guidance document for industry spotlighting risks related to doing business with or connected to forced labor practices in Xinjiang and elsewhere in China. The Advisory underscores that businesses and individuals engaged in certain industries may face reputational or legal risks if their activities involve support for or acquisition of goods from commercial or governmental actors involved in illicit labor practices and identifies potential indicators of forced labor, including factories located within or near known internment camps.

Separately, and as discussed further below, the U.S. Department of State on September 30, 2020 issued guidance specifically focused on exports to foreign government end-users of products or services with surveillance capabilities with an eye toward preventing such items from being used to commit human rights abuses of the sort reported in Xinjiang.

Underscoring the extent of U.S. concern about the situation in Xinjiang, then-Secretary of State Pompeo on the Trump administration’s last full day in office issued a determination that the Chinese government’s activities in the region constitute genocide and crimes against humanity—a declaration that was quickly echoed by current Secretary of State Antony Blinken in his Senate confirmation hearing. While the declaration triggers few immediate consequences under U.S. law, it could portend further U.S. sanctions designations related to China’s treatment of ethnic and religious minorities.

F. Trade Imbalances and Tariffs

Also in 2020, the Trump administration continued to make broad use of its authority to impose tariffs on Chinese-made goods. This policy approach met with significant opposition from private plaintiffs, setting the stage for substantial and largely unresolved litigation at the U.S. Court of International Trade. The year began with significant tariffs already in place through two mechanisms: Section 232 of the Trade Expansion Act of 1962 (“Section 232”), which allows the President to adjust the imports of an article upon the determination of the U.S. Secretary of Commerce that the article is being imported into the United States in such quantities or under such circumstances as to impair the national security, and Section 301 of the Trade Act of 1974 (“Section 301”), which allows the President to direct the U.S. Trade Representative to take all “appropriate and feasible action within the power of the President” to eliminate unfair trade practices or policies by a foreign country.

1. Section 232

On January 24, 2020, President Trump issued a proclamation under Section 232 expanding the scope of existing steel and aluminum tariffs (25 percent and 10 percent, respectively) to cover certain derivatives of aluminum and steel such as nails, wire, and staples, which went into effect on February 8, 2020. President Biden has stated that he plans to review the Section 232 tariffs, although no immediate timetable for that review has been set forth to date.

Two cases of note regarding the scope of the President’s power to impose Section 232 tariffs were decided this year. In Transpacific Steel LLC v. United States, 466 F.Supp. 3d 1246 (CIT 2020), the court held that Proclamation 9772, which imposed a 50 percent tariff on steel products from Turkey, was unlawful because it violated Section 232’s statutory procedures and the Fifth Amendment’s Equal Protection guarantees. The court noted that Section 232 “grants the President great, but not unfettered, discretion,” and agreed with the importers that the President acted outside the 90-day statutorily mandated window and without a proper report on the national security threat posed by steel imports from Turkey. The court also agreed that Proclamation 9772 denied the importers the equal protection of law because it arbitrarily and irrationally doubled the tariff rate on Turkish steel products and there was “no apparent reason to treat importers of Turkish steel products differently from importers of steel products from any other country listed in the” relevant report. While Transpacific limited the President’s power to impose Section 232 tariffs, on February 28, 2020, the Federal Circuit rejected a constitutional challenge to Section 232 itself and held that Section 232 did not unlawfully cede authority to control trade to the President in violation of the Constitution’s nondelegation doctrine, and the 232 tariffs remain in place.

On December 14, 2020, the Commerce Department published a notice announcing changes to the Section 232 steel and aluminum tariffs exclusions process. Changes include (1) the adoption of General Approved Exclusions for specific products; (2) a new volume certification requirement meant to limit requests for more volume than needed compared to past usage; and (3) a streamlined review process for “No Objection” exclusion requests.

2. Section 301

Although the Trump administration initiated Section 301 tariff investigations involving multiple jurisdictions, the Section 301 tariffs that have dominated the headlines are the tariffs imposed on China in retaliation for practices with respect to technology transfer, intellectual property, and innovation that the Office of the U.S. Trade Representative (“USTR”) has determined to be unfair (“China 301 Tariffs”). The China 301 Tariffs were imposed in a series of waves in 2018 and 2019, and as originally implemented they together cover over $500 billion in products from China.

On January 15, 2020, the United States and China signed a Phase One Trade Agreement, leading to a slight reprieve in the U.S.-China trade dispute. As part of that agreement, the United States agreed to suspend indefinitely its List 4B tariffs and to reduce its List 4A tariffs to 7.5 percent. Pursuant to the agreement, China committed (1) to purchase an additional $200 billion in U.S. manufactured, agriculture, and energy goods and services as compared to a 2017 baseline; (2) to address U.S. complaints about intellectual property practices by providing stronger Chinese legal protections and eliminating pressure for foreign companies to transfer technology to Chinese firms as a condition of market access; (3) to implement certain regulatory measures to clear the way for more U.S. food and agricultural exports to China; and (4) to improve access to China’s financial services market for U.S. companies. A “Phase Two” trade deal never materialized following strained relations between the two countries catalyzed in part over the coronavirus pandemic.

As the statute of limitations to challenge two of the larger China 301 Tariff tranches (List 3 and List 4A) approached with no further progress beyond the Phase One Trade Agreement, in an unprecedented act thousands of parties affected by the tariffs filed suit at the Court of International Trade, alleging that the tariffs were not properly authorized by the Trade Act of 1974, and that USTR violated the Administrative Procedure Act when it imposed them. More than 3,500 actions, some filed jointly by multiple plaintiffs, were filed, and case management issues are still under development: the U.S. Court of International Trade has not yet designated a “test” case or cases—the case(s) which will be resolved first, while the rest of the cases are stayed pending resolution—or determined if the case(s) will be heard by a three-judge panel. These arguments are playing out on the docket of HMTX Industries LLC v. United States, Ct. No. 20-00177, which we presume will be a lead case.

Although the China 301 Tariffs were a hallmark of the Trump administration’s trade policy, we expect them to remain in place under the Biden-Harris administration, at least during an initial period of review. President Biden has nominated Katherine Tai, the former lead trade attorney for the U.S. House of Representatives Ways and Means Committee, to serve as USTR. Her background includes significant China-related expertise—including successful litigation at the World Trade Organization, involvement in drafting proposed legislation on China-related issues, such as Uyghur forced labor, and experience as USTR’s chief counsel for China enforcement—suggesting that China will remain a focus of U.S. trade policy going forward.

G. China’s Counter-Sanctions – The Chinese Blocking Statute

The Chinese Blocking Statute, which we discuss at greater depth in our recent client alert, creates a reporting obligation for Chinese persons and entities impacted by extra-territorial foreign regulations. Critically, this reporting obligation is applicable to Chinese subsidiaries of multinational companies. The Chinese Blocking Statute also creates a private right of action for Chinese persons or entities to seek civil remedies in Chinese courts from anyone who complies with prohibited extra-territorial measures.

While the Chinese regulations remain nascent and the initial list of extra-territorial measures that the Chinese Blocking Statute will cover has yet to be published, the law marks a material escalation in the longstanding Chinese threats to impose counter-measures against the United States (principally) by establishing a meaningful Chinese legal regime that could challenge foreign companies with operations in China. If the European model for the Chinese Blocking Statute continues to serve as Beijing’s inspiration, we will likely see both administrative actions to enforce the measure as well as private sector suits to compel companies to comply with contractual obligations, even if doing so is in violation of their own domestic laws.

The question for the United States with respect to this new Chinese law will be how to balance the aggressive suite of U.S. sanctions and export control measures levied against China—which the U.S. government is unlikely to pare back—against the growing regulatory risk for global firms in China that could be caught between inconsistent compliance obligations. As has long been the case, international companies will continue to be on the front lines of Washington-Beijing tensions and they will need to remain flexible in order to respond to a fluid regulatory environment and maintain access to the world’s two largest economies.

H. New Chinese Export Control Regime

On December 1, 2020, the Export Control Law of the People’s Republic of China (“China’s Export Control Law”) officially took effect. This marks a milestone on China’s long-running efforts towards a comprehensive and unified export control regime and to large parts has been discussed in detail in our recent client alert.

By passing China’s Export Control Law, China has formally introduced concepts common to other jurisdictions, yet new to China’s export control regime such as, inter alia, embargos, into its export control regime, and particularly expands the scope of China’s Export Control Law to have an extraterritorial effect. Compared to China’s prior export control rules scattered in various other laws and regulations, China’s Export Control Law has also imposed significantly enhanced penalties in case of violations. Pursuant to China’s Export Control Law, the maximum monetary penalties in certain violations could reach 20 times the illegal income. Any foreign perpetrators may also be held liable, although unclear how.

Before this new law came into effect, China already took actions to curb the export control of sensitive technologies. On August 28, 2020, in the midst of the forced TikTok sale demanded by the U.S. government, China amended its Catalogue of Technologies Whose Exports Are Prohibited or Restricted to capture additional technologies, including “personalized information push service technology based on data analysis” that is relied upon by TikTok. Such inclusion would make it extremely challenging, if not impossible, to export the captured technologies because “substantial negotiation” of any technology export agreement with respect to such technology may not be conducted without the approval of the relevant Chinese authorities.

In addition to China’s Export Control Law, detailed provisions with respect to China’s unreliable entity list were unveiled on September 19, 2020, namely, the Provisions on the Unreliable Entities List. This unreliable entity list, which may include foreign companies and individuals (although none has been identified so far), has been deemed by some as China’s attempt to directly counter BIS’s frequent use of its entity list. For those listed in China’s unreliable entity list, China-related import and export, investment and other business activities may be restricted or prohibited.

Although there has been no official update so far with respect to exactly whom or which entity would be placed on China’s control list or unreliable entity list, China has imposed sanctions on a number of U.S. individuals and entities in the second half of 2020, which has been perceived as a counter measure against U.S.’s sanctions of Chinese (including Hong Kong) entities and officials.

For instance, on December 10, 2020, shortly after the Hong Kong-related designations by the U.S. Department of the Treasury on December 7, 2020, a spokesperson from China’s Ministry of Foreign Affairs announced sanctions against certain U.S. officials for “bad behavior” over Hong Kong issues and revoked visa-free entry policy previously granted to U.S. diplomatic passport holders when visiting Hong Kong and Macau.

II. U.S. Sanctions Program Developments

A. Iran

During the second half of 2020, the outgoing Trump administration and then-candidate Biden articulated sharply contrasting positions on Iran sanctions—both bearing the hallmarks of their broader approaches to foreign policy. In its final push for “maximum economic pressure,” the Trump administration sought to impose additional sanctions that would make it more difficult for the Biden-Harris administration to reenter the JCPOA, the nuclear deal negotiated by the Obama administration. At the same time, then-candidate Biden laid out his plan to reengage with Iran, reinstate compliance with the JCPOA, and roll back the U.S. sanctions that had been re-imposed.

With the international community rebuffing efforts to abandon the JCPOA and Iran’s current government signaling interest in a quick return to the deal, the stage could be set for the Biden-Harris administration to achieve its goals for Iran, although the timing is uncertain. Domestic political concerns in both countries, a global pandemic, and pressure from U.S. allies in the Middle East could frustrate these efforts and ensure the sanctions status quo remains in the near term.

The Trump administration’s effort in August and September to snap United Nations sanctions back into effect marked the culmination of a years-long campaign intended to drive Iran to negotiate a more comprehensive deal for relief. Where the JCPOA only addressed Iran’s nuclear program, the Trump administration sought an agreement regulating more facets of Iran’s “malign activities” in return for sanctions relief. The “maximum economic pressure” campaign began in earnest in November 2018 with the full re-imposition of sanctions that had been lifted under the terms of the JCPOA. As we discussed in our 2019 Year-End Sanctions Update, the campaign continued throughout 2019, as the United States targeted new industries and entities and ramped up pressure on previously sanctioned persons.

The Trump administration continued increasing this pressure over the course of 2020, while clarifying the scope of humanitarian exemptions in response to the global coronavirus pandemic. Our 2020 Mid-Year Sanctions and Export Controls Update details re-imposition of restrictions on certain nuclear activities, a steady stream of new designations, and the expansion of U.S. secondary sanctions to target new sectors of the Iranian economy. This increasing pressure was accompanied by several measures designed to facilitate Iran’s response to the coronavirus pandemic, including additional interpretive guidance, approved payment mechanisms, and a new general license.

Trump administration efforts in the latter half of 2020 were more focused on maximizing economic pressure on Iran. OFAC made use of new secondary sanctions authorities to impose additional sanctions on Iran’s financial sector, and announced further authorities targeting conventional arms sales to Iran, responding directly to the impending rollback of UN sanctions. The steady stream of designations also continued, with OFAC focusing particularly on entities operating in or supporting Iran’s petroleum and petrochemicals trade (see e.g., designation announcements in September, October, and December), including additional restrictions on the Iranian Ministry of Petroleum, the National Iranian Oil Company (“NIOC”), and the National Iranian Tanker Company (“NITC”). OFAC also designated several rounds of new targets, including senior officials in the Iranian government, for alleged involvement in human rights violations.

Despite this mounting economic pressure, Iran has still found ways to slip through the grasp of the tightening embargo. In the fall of 2020, market watchers observed a sharp uptick in Iranian oil exports. Increasing demand among U.S. adversaries—including China and Venezuela—along with steep discounts from Iran have likely contributed to the spike in exports. Increasingly-sophisticated evasion tactics have helped too—despite State Department guidance published in May 2020 to address these deceptive shipping practices.

The U.S. also continued to pursue criminal penalties for entities that tried to evade U.S. sanctions. In August, the United States charged an Emirati entity and its managing director for implementing a scheme to circumvent U.S. sanctions and supply aircraft parts to Mahan Air, an Iranian airline and longtime target of U.S. export controls and sanctions designated for supporting Iran’s Islamic Revolutionary Guard Corps’ Quds Force. OFAC simultaneously imposed sanctions on those Emirati targets, as well as several other associated entities. These enforcement efforts hit one notable setback in July, when a judge in the Southern District of New York dismissed a case against Ali Sadr Hashemi Nejad, who had been convicted of using the U.S. financial system to process payments to Iran. The judge vacated Mr. Nejad’s conviction after the U.S. Attorney’s office revealed alleged misconduct by the prosecutors that originally tried the case—including efforts to “bury” evidence turned over to the defense.

Efforts to increase pressure on Iran reached their zenith with the Trump administration’s unilateral push to trigger the snapback of broad international sanctions on Iran. In an effort to ensure that the JCPOA remained responsive to concerns about Iran’s compliance, the original parties included a mechanism that would allow the UN-based international sanctions regime to snap back into place if a party to the agreement brought a compliant that Iran was not in compliance. The United States attempted to trigger this snapback mechanism by submitting allegations of Iranian noncompliance to the UN Security Council on August 20, 2020. The other members of the Security Council flatly rejected the U.S. efforts. They argued that the United States, which had withdrawn from the agreement in 2018, no longer had standing to trigger the snapback, and, although they acknowledged Iran’s noncompliance, they expressed a preference for resolving the issue within the confines of the JCPOA. Nevertheless, in keeping with the timelines provided in the JCPOA, Secretary Pompeo announced “the return of virtually all previously terminated UN sanctions” on September 19. The remaining members of the JCPOA ignored the announcement and did not re-impose restrictions.

This fatigue with the current U.S. position and the calls for further leniency in response to the pandemic have created an international environment that may facilitate the Biden-Harris administration’s plans to return to the JCPOA. President Biden and his National Security Adviser, Jake Sullivan, have clearly stated that, if Iran returns to “strict compliance,” the administration would rejoin the JCPOA. For its part, Iranian President Hassan Rouhani has announced that Iran would hasten to comply with the JCPOA if the U.S. were to rejoin. Iran’s supreme leader, Ayatollah Ali Khamenei, may also favor a return to the JCPOA, as more reliable oil revenues are important to help ensure future domestic stability.

However, the window for a return to the JCPOA may be narrow and may not accommodate the Biden-Harris administration’s desire for follow-on agreements addressing other aspects of Iran’s malign activities. Iranian elections are coming up in June, and hard-liners have signaled their opposition to a revived JCPOA. Iran has also increased its uranium enrichment and begun construction projects at its most significant nuclear facilities. This activity could embolden domestic opposition in the United States, where there is already limited appetite for a return to the basic JCPOA structure. Even close Biden ally Senator Chris Coons (D-DE) has suggested that a revised deal should address not only the nuclear issues covered by the JCPOA but also Iran’s missile program. If domestic political concerns prevent a return to the agreement, sanctions could continue to tighten and could even return to pre-JCPOA levels if Iran intensifies its noncompliance.

B. Venezuela

Despite the far reaching effects of OFAC’s current Venezuela sanctions program, which has crippled Venezuela’s state-owned oil company, Petróleos de Venezuela, S.A. (“PdVSA”), the regime of President Nicolás Maduro remains firmly entrenched, and emerged victorious from a December 2020 legislative election that U.S. Secretary of State Mike Pompeo described as a “political farce.” The results have made it increasingly difficult for Venezuela’s opposition movement seeking to oust Maduro, further undermining opposition leader and Interim President Juan Guaidó. The economic devastation, political instability, and compounding impacts of the pandemic have continued the refugee crisis pressuring some of Venezuela’s neighbors and creating an even more delicate security environment for the Biden-Harris administration.

At the end of 2020, Biden-Harris transition representatives suggested that the new administration would push for free and fair elections in Venezuela in exchange for sanctions relief, but not necessarily to require Maduro’s surrender as a condition of negotiations. The approach is expected to be coordinated with international allies, and Maduro’s foreign backers in Russia, China, Iran and Cuba will likely be involved. The Biden-Harris team has promised to review existing OFAC sanctions with respect to Venezuela, assessing which potential measures may be lifted as part of any future discussions.

As we described in our 2020 Mid-Year Sanctions and Export Controls Update, last year the Trump administration deployed an array of tools to deny the Maduro regime the resources and support necessary to sustain its hold on power—from indicting several of Venezuela’s top leaders to aggressively targeting virtually all dealings with Venezuela’s crucial oil sector with sanctions, including designating prominent Chinese and Russian companies involved with the sector. In February and March 2020, OFAC designated two subsidiaries of the Russian state-controlled oil giant Rosneft for brokering the sale and transport of Venezuelan crude—prompting Rosneft to sell off the relevant assets and operations to a unnamed company. On November 30, 2020, OFAC announced another major designation under the Venezuela sanctions program, China National Electronic Import-Export Company (“CEIEC”). OFAC explained that CEIEC supported the Maduro regime’s “malicious cyber efforts,” including online censorship, strategically timed intentional electricity and cellphone blackouts, and a fake website purportedly for volunteers to participate in the delivery of international humanitarian aid that was actually designed to phish for personal information. CEIEC has over 200 subsidiaries and offices worldwide, and through the application of OFAC’s 50 Percent rule any subsidiaries that are at least half-owned by CEIEC will be subject to the same restrictions as CEIEC.

On December 18, 2020, OFAC designated a Venezuelan entity and two individuals for providing material support to the Maduro regime, including by providing goods and services used to carry out the “fraudulent” parliamentary elections. On December 30, 2020, OFAC designated a Venezuelan judge and prosecutor for involvement in the unfair trial of the “Citgo 6,” six executives of PdVSA’s U.S. subsidiary Citgo who were lured to Venezuela under false pretenses and arrested in 2017.

OFAC also narrowed the scope of activities authorized by several general licenses. In April 2020, OFAC further restricted dealings with Venezuela’s oil sector by narrowing one of the few remaining authorizations for U.S. companies to engage in dealings with PdVSA. On November 17, 2020, OFAC extended this narrowed version of General License 8 through June 3, 2021. On January 4, 2021, OFAC revised General License 31A, which authorized certain transactions involving the Venezuelan National Assembly and Guaidó, to specify that it applies only to the members of the National Assembly seated on January 5, 2016, i.e. prior to the December 2020 election.

C. Cuba

The Trump administration continued its pressure on Cuba in 2020, in an ostensible attempt to appeal to Cuban-American and other voters in Florida prior to the election and then to bind the incoming Biden-Harris administration from shifting course in U.S.-Cuba relations. The new U.S. administration had previously nodded to changes in U.S.-Cuba relations, with then-candidate Biden criticizing the Trump administration for inflicting harm on the Cuban people and promising to roll back certain Trump’s policies. That said, Biden-Harris representatives acknowledged that significant change was unlikely to happen anytime soon.

1. Designations and Remittance Restrictions

As we analyzed in our 2020 Mid-Year Sanctions and Export Controls Update, the Trump administration added numerous entities to the State Department’s Cuba Restricted List this year, thus prohibiting U.S. persons and entities from engaging in direct financial transactions with them and imposing certain U.S. export control licensing requirements. Between June and September 2020, the State Department added numerous Cuban military-owned sub-entities—most operating in Cuba’s tourism industry—to the Cuba Restricted List, including the financial services company Financiera Cimex (“FINCIMEX”) and its subsidiary American International Services (“AIS”). In October 2020, OFAC amended the Cuban Assets Control Regulations (“CACR”) to prohibit indirect remittance transactions with entities on the Cuba Restricted List, including transactions relating to the collection, forwarding, or receipt of remittances. The U.S. administration turned the screws again on FINCIMEX in December 2020, designating it, Kave Coffee, and their Cuban military-controlled umbrella enterprise Grupo de Administración Empresarial (“GAESA”) to the SDN List. On January 15, 2021, five days before President Biden’s inauguration, OFAC designated the Cuban Ministry of Interior (“MININT”) and its leader, Lazaro Alberto Álvarez Casas, for human rights abuses relating to the monitoring of political activity. According to OFAC, Cuban dissident Jose Daniel Ferrer was beaten, tortured, and held in isolation in a MININT-controlled prison in September 2019.

Furthermore, on January 11, 2021, the State Department re-designated Cuba as a State Sponsor of Terrorism (“SST”), on the grounds that Cuba “repeatedly provid[es] support for acts of international terrorism in granting safe harbor to terrorists,” and in a direct reversal of a May 2015 decision by the Obama administration to remove that designation. An SST designation imposes several restrictions, including a ban on Cuba-related defense exports, credits, guarantees, other financial assistance, and export licensing overseen by the State Department (Section 40 of the Arms Export Control Act); a license requirement (with a presumption of denial) for exports of dual-use items to Cuba (Section 1754(c) of the National Defense Authorization Act for Fiscal Year 2019); and a ban on U.S. foreign assistance to Cuba (Section 620A of the Foreign Assistance Act). The SST designation opens the door for other U.S. federal agencies to impose further restrictions, and it remains to be seen how the new Biden-Harris administration will navigate the course. When President Obama lifted the designation, that procedure required months of review by the State Department, a 45-day pre-notification period for Congress, and a cooperative Congress that did not exercise the blocking authority made available to it under the Arms Export Control Act.

3. Travel Restrictions

In September 2020, OFAC amended the CACR for the first time since September 2019. In this amendment, OFAC targeted Cuba’s travel, alcohol, and tobacco industries by prohibiting any U.S. person from engaging in lodging transactions, either directly or indirectly, with any property that the Secretary of State has identified as owned or controlled by the Cuban government or its prohibited officials and their relatives. Concurrent with this change, the State Department published the new Cuba Prohibited Accommodations List to identify the lodging properties that would trigger this prohibition. Additionally, the CACR amendment eliminated certain general licenses to restrict attendance at professional meetings or conferences in Cuba and attendance at or transactions incident to public performances, clinics, workshops, other athletic or non-athletic competitions, and exhibitions in Cuba.

4. Helms-Burton Act

As we wrote in May 2019, on April 17, 2019, the Trump administration lifted long-standing limitations on American citizens seeking to sue over property confiscated by the Cuban regime after the revolution led by Fidel Castro six decades ago. Title III of the Cuban Liberty and Democratic Solidarity (“LIBERTAD”) Act of 1996, commonly known as the Helms-Burton Act, authorizes current U.S. citizens and companies whose property was confiscated by the Cuban government on or after January 1, 1959 to bring suit for monetary damages against individuals or entities that “traffic” in that property. The policy rationale for this private right of action was to provide recourse for individuals whose property was seized by the Castro regime. As part of the statutory scheme, Congress provided that the President may suspend this private right of action for up to six months at a time, renewable indefinitely. Until May 2019, U.S. Presidents of both parties had consistently suspended that statutory provision in full every six months. While President Biden could suspend the private right of action, already-existing Title III lawsuits are authorized under the Helms-Burton Act to run to completion, inclusive of any appeals.

D. Russia

Although the COVID-19 pandemic and resulting economic crisis dominated President Biden’s first few days in office, his administration was forced to act fast to achieve an extension of the New Strategic Arms Reduction Treaty (“New START”) arms control treaty ahead of a February 5, 2021 deadline. The extension to February 4, 2026, does not necessarily portend any greater degree of cooperation between the two countries, however, as the new U.S. administration has suggested that it may impose new measures on Russia pending an intelligence assessment of its recent activities.

1. CAATSA Section 224 Russian Cyber Sanctions

As noted above, U.S. federal agencies are still assessing the scope and impact of the recent Russian cyberattack that breached network security measures of at least half a dozen cabinet-level agencies and many more private sector entities, which could lead to sanctions under a 2015 Executive Order targeting persons engaged in malicious cyber activities or Section 224 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). There is recent precedent for such actions—on October 23, 2020, OFAC designated Russia’s State Research Center of the Russian Federation FGUP Central Scientific Research Institute of Chemistry and Mechanics (“TsNIIKhM”) pursuant to Section 224 of CAATSA for TsNIIKhM’s involvement in the development and spread of Triton malware, also known as TRISIS or HatMan, which targets and manipulates industrial safety systems and has been described as “the most dangerous” publicly known cybersecurity threat. Triton first made news in 2017 after it crippled a petrochemical plant in Saudi Arabia, and OFAC warned that Russian hackers had turned their attention to U.S. infrastructure, where at least 20 electric utilities have been probed by hackers for vulnerabilities since 2019.

2. CAATSA Section 231 Russian Military Sanctions

On December 14, 2020, the United States imposed sanctions on the Republic of Turkey’s Presidency of Defense Industries (“SSB”), the country’s defense procurement agency, and four senior officials at the agency, for its dealings with Rosoboronexport (“ROE”), Russia’s main arms export entity, in procuring the S-400 surface-to-air missile system. As we described in December 2020, Section 231 of CAATSA required the imposition of sanctions on any person determined to have knowingly engaged in a significant transaction with the defense or intelligence sectors of the Russian government. Notwithstanding Section 231’s mandatory sanctions requirement, the Trump administration repeatedly tried to pressure Turkey to abandon the ROE deal before sanctions were imposed. In line with a growing list of non-SDN measures managed by OFAC (including the Sectoral Sanctions and the Communist Chinese Military Companies investment restrictions), these sanctions are not full blocking measures and the SSB listing led OFAC to construct a new Non-SDN Menu-Based Sanctions List.

3. CAATSA Section 232 Nord Stream 2 and TurkStream Sanctions

U.S. efforts to block Russia’s ongoing construction of major gas export pipelines to bypass Ukraine have been a longstanding source of tension not just between Washington and Moscow but also with the United States’ core European allies. In Section 232 of CAATSA, Congress authorized—but did not require—the President to impose certain sanctions targeting Russian energy export pipelines “in coordination with allies of the United States,” a statement of apparent deference to NATO allies like Germany and Turkey that would benefit most from the construction of the Nord Stream 2 and the TurkStream pipelines. That deference waned in the intervening years, and as we wrote in our 2019 Year-End Sanctions Update, the National Defense Authorization Act for Fiscal Year 2020 (“2020 NDAA”) included provisions requiring the imposition of sanctions against vessels and persons involved in the construction of the Nord Stream 2 and the TurkStream pipelines. Although the inclusion of these sanctions signaled U.S. support for Ukraine, their impact was thought to be minimal as the pipelines’ construction was nearly complete (only one 50-mile gap remained of the Nord Stream 2 pipeline).

But the impact was more severe than anticipated. On July 15, 2020, the Department of State updated its guidance concerning the applicability of sanctions under Section 232 of CAATSA, expanding its scope to almost all entities involved in the construction of the Nord Stream 2 or TurkStream gas pipelines, not just to those who initiated their work after CAATSA’s enactment. And on January 1, 2021, as part of the NDAA for Fiscal Year 2021, Congress amended CAATSA to authorize sanctions for foreign persons whom the Secretary of State, in consultation with the Secretary of the Treasury, deems to have knowingly helped provide pipe-laying vessels for Russian energy export pipelines.

Despite these sanctions—as well as growing domestic opposition to Russia in the aftermath of the poisoning of Russian opposition leader Aleksei Navalny—Germany remains committed to completing Nord Stream 2, which is now over 90 percent finished. Indeed, in early January, Germany’s Mecklenburg-Vorpommern State Parliament voted to create a state-owned foundation to facilitate the pipeline’s construction, taking advantage of an exemption added on January 1 for EU governmental entities not operating as a business enterprise.

4. Other Recent Russian Designations

In July 2020, OFAC targeted Russian financier Yevgeniy Prigozhin’s wide-ranging network of companies in Sudan, Hong Kong and Thailand. Prigozhin has been the target of U.S. sanctions since 2016, and purportedly financed the Internet Research Agency, a Russian troll farm designated by OFAC in 2018, as well as Private Military Company (“PMC”) Wagner, a Russian military proxy force active in Ukraine, Syria, Sudan and Libya that was designated by OFAC in 2017. OFAC highlighted Prigozhin’s role in Sudan and the “interplay between Russia’s paramilitary operations, support for preserving authoritarian regimes, and exploitation of natural resources.” OFAC also targeted Prigozhin’s network of financial facilitators in Hong Kong and Thailand. In September 2020, OFAC imposed sanctions on entities and individuals working on behalf of Prigozhin to advance Russia’s interest in the Central African Republic (“CAR”).

Also in September, OFAC imposed blocking sanctions on Andrii Derkach, a member of the Ukrainian parliament and an alleged agent of Russia’s intelligence services. According to the U.S. Department of the Treasury, Derkach waged a “covert influence campaign” against then-candidate Biden by distributing false and unsubstantiated narratives through media outlets and social media platforms with the aim of undermining the 2020 U.S. presidential election. An additional round of sanctions was announced on January 11, targeting individuals and news outlets in Ukraine that cooperated with Derkach in his efforts to interfere in the 2020 U.S. election. OFAC also extended two Ukraine-related General Licenses, 13P and 15J, that permit U.S. persons to undertake certain transactions related to GAZ Group, which was among the Russian entities designated on April 6, 2018 for being owned by one or more Russian oligarchs or senior Russian government officials. Among other actions, the regulatory authorizations, extended for over one year to January 26, 2022, allow U.S. persons to transfer or divest their holdings in GAZ Group to non-U.S. persons, allow U.S. persons to facilitate the transfer of holdings in GAZ Group by a non-U.S. person to another non-U.S. person, and allow U.S. persons to engage in certain transactions related to the manufacture and sale of automobiles, trucks, and other vehicles produced by GAZ Group or its subsidiaries.

E. North Korea

As we described in our 2020 Mid-Year Sanctions and Export Controls Update, the United States continued to expand its campaign to isolate North Korea economically and to cut off illicit avenues of international support for its nuclear, chemical, and biological weapons programs. In addition to amending the North Korea Sanctions Regulations (“NKSR”), U.S. authorities issued sanctions advisories and pursued multiple enforcement actions against persons who violated these sanctions.

1. NKSR Amendments

On April 10, 2020, OFAC issued amendments to the NKSR, 31 C.F.R. part 510, to implement certain provisions of the North Korea Sanctions and Policy Enhancement Act of 2016 (“NKSPEA”), as amended by CAATSA, and the 2020 NDAA. Changes included implementing secondary sanctions for certain transactions; adding potential restrictions to the use of correspondent accounts for non-U.S. financial institutions that provide significant services to identified SDNs; prohibiting non-U.S. subsidiaries of U.S. financial institutions from transacting with the government of North Korea or any SDN designated under the NKSR; and revising the definitions of “significant transactions” and “luxury goods.”

These amendments mark a significant jurisdictional expansion; in addition to potential secondary sanctions for foreign financial institutions that conduct significant business with North Korea, foreign banks that are subsidiaries of U.S. financial institutions are now directly subject to the NKSR. Thus, although the ailing condition of North Korea’s economy may limit the impact of these measures on the international community, they put global financial institutions on notice to be vigilant with sanctions compliance and mindful of any dealings with North Korea.

2. Ballistic Missile Procurement Advisory

On September 1, 2020, the U.S. Departments of State, Treasury, and Commerce issued an advisory on North Korea’s ballistic missile procurement activities. The advisory identified key North Korean procurement entities, including the Korea Mining Development Trading Corporation (“KOMID”), the Korea Tangun Trading Corporation (“Tangun”), and the Korea Ryonbong General Corporation (“Ryonbong”), and provided an annex identifying the main materials and equipment that North Korea is looking to source internationally for its ballistic missile program. The guidance also highlighted various procurement tactics that North Korea employs, including using North Korean officials accredited as diplomats to orchestrate the acquisition of sensitive technology; collaborating with foreign-incorporated companies (often Chinese and Russian entities) to acquire foreign-sourced basic commercial components; and mislabeling sensitive goods to escape export control requirements or to conceal the true end user.

The advisory emphasized that suppliers must not only watch for items listed in the Annex—or on U.S. or UN control lists—but also for widely available items that may end up contributing to the production or development of weapons of mass destruction (“WMD”). The electronics, chemical, metals, and materials industries, as well as the financial, transportation, and logistics sectors, are at particular risk of such end-use exposure and must pay heed to “catch-all” controls, such as United Nations Security Council Resolution (“UNSCR”) 2270, that require authorization, like a license or permit, if there is any risk that their products may contribute to WMD-related programs. Consistent with OFAC’s compliance framework, the advisory encouraged companies to take a risk-based approach to sanctions compliance.

3. SDN Designations in the Shipping Industry

In May 2020, OFAC, the Department of State, and the U.S. Coast Guard issued a global advisory warning the maritime industry, as well as the energy and metals sectors, about deceptive shipping practices used to evade sanctions. Numerous designations throughout the course of 2020 demonstrate OFAC’s continued focus on the shipping industry and North Korean trade. On December 8, 2020, OFAC designated six entities and four vessels for violating UNSCR 2371’s restrictions on transporting or exporting North Korean coal. Designees include several Chinese entities (two of which were also registered in the United Kingdom), as well as companies in Hong Kong and Vietnam.

4. Criminal Enforcement

The violation of North Korean sanctions also continues to be an enforcement priority for both OFAC and U.S. Department of Justice. As we described in our 2020 Mid-Year Sanctions and Export Controls Update, on May 28, 2020, DOJ unsealed an indictment charging 33 individuals, acting on behalf of North Korea’s Foreign Trade Bank, for facilitating over $2.5 billion in illegal payments to support North Korea’s nuclear program.

DOJ and OFAC have also focused on non-North Korean companies who have supported the efforts of their North Korean customers to access the U.S. financial system. In July 2020, OFAC and DOJ announced parallel resolutions with UAE-based Essentra FZE Company Limited (“Essentra”) for violating the NKSR by exporting cigarette filters to North Korea using deceptive practices, including the use of front companies. On August 31, 2020, DOJ announced that Yang Ban Corporation (“Yang Ban”), a company established in the British Virgin Islands that operated in South East Asia, pled guilty to conspiring to launder money in connection with evading sanctions on North Korea and deceiving correspondent banks into processing U.S. dollar transactions.

Lastly, on January 14, 2021, OFAC announced a settlement with Indonesian paper products manufacturer PT Bukit Muria Jaya (“BMJ”) to resolve alleged violations of the NKSR connected to the exportation of cigarette paper to North Korea. DOJ announced a parallel resolution with BMJ through a Deferred Prosecution Agreement (“DPA”) to resolve allegations of conspiracy to commit bank fraud shortly thereafter. The Yang Ban and BMJ matters highlight DOJ’s increasing use of the money laundering and bank fraud statutes to pursue criminal cases related to sanctions violations, as neither case included an alleged violation of IEEPA.

F. Syria

OFAC continues to maintain a comprehensive and wide-ranging sanctions regime against the Bashal al-Assad regime in Syria. On August 20, 2020, OFAC designated Assad’s press officer and the leader of the Syrian Ba’ath Party under Executive Order 13573 as senior Government of Syria officials, while the State Department simultaneously imposed sanctions on several individuals under Executive Order 13894 for their role in “the obstruction, disruption, or prevention of a political solution to the Syrian conflict and/or a ceasefire in Syria.”

On September 30, 2020, OFAC and the State Department designated additional “key enablers of the Assad regime,” including the head of the Syrian General Intelligence Directorate, the Governor of the Central Bank of Syria, and a prominent businessman (and his businesses) who served as a local intermediary for the Syrian Arab Army, while on November 9 OFAC and State designated additional individuals and entities, focusing on stymying Syria’s attempt to revive its petroleum industry. Rounding out the year, on December 22, 2020, OFAC and the State Department sanctioned additional senior government officials and entities, including Assad’s wife, Asma al-Assad—who had already been designated in June 2020—as well as several members of her family.

Additionally, on December 22, OFAC officially designated the Central Bank of Syria (“CBS”) as an SDN. However, as the accompanying press release noted, the CBS has been blocked under Executive Order 13582 since 2011. As a simultaneously issued FAQ states, the designation “underscore[es] its blocked status” but “does not trigger new prohibitions.” The FAQ includes the reminder that “non-U.S. persons who knowingly provide significant financial, material, or technological support to, or knowingly engage in a significant transaction with the Government of Syria, including the [CBS], or certain other persons sanctioned with respect to Syria, risk exposure to sanctions.” Another FAQ, issued on the same date, reiterated that U.S. and non-U.S. persons can continue engage with CBS in authorized transactions that provide humanitarian assistance to Syria, and clarified that OFAC will not consider transactions to be “significant” if they are otherwise authorized to U.S. persons, and therefore non-U.S. persons are not prohibited from participating in transactions that provide humanitarian assistance to the people of Syria.

G. Other Sanctions Developments

1. Belarus

During the second half of 2020, OFAC designated several individuals and entities for their role in participating in the fraudulent August 9, 2020 Belarus presidential election or the violent suppression of the peaceful protests that followed. Beginning in August 2020, the Belarusian government instituted a violent crackdown on wide scale protests that had erupted following the reelection of longtime leader Aleksandr Lukashenko, which had been widely denounced as fraudulent. The crackdown was broadly condemned internationally, with both the U.S. and EU imposing sanctions on those determined to have been involved in orchestrating the election fraud or the subsequent violence.

On October 2, 2020, OFAC, in coordination with the United Kingdom, Canada, and EU, designated eight individuals under Executive Order 13405, which was initially promulgated in response to Lukashenko’s questionable reelection in 2006. The eight individuals include Belarus’s Interior Minister and his deputy, the leaders of organizations involved in violently suppressing protesters, the Commander and Deputy Commander of the Ministry of the Interior’s Internal Troops, and the Central Election Commission’s Deputy Chairperson and Secretary. Several months later, on December 23, OFAC designated the Chief of the Criminal Police as well as four entities involved in the administration of the election and subsequent crackdown. The EU similarly imposed three rounds of sanctions on a total of 88 individuals and 7 entities following the August 9, 2020 election, while Canada and the United Kingdom also imposed sanctions on Belarus.

2. Ransomware Advisory

On October 1, 2020, OFAC issued an “Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments,” which details the sanctions risk posed by paying ransom to malicious cyber actors on behalf of victims of cyberattacks. The Advisory provides several examples of SDNs who have been designated due to their malicious cyber activities, and underscores the prevalence of such actors on OFAC’s sanctions lists. While the Advisory did not break new ground, it emphasizes that facilitating a ransomware payment, even on behalf of a victim of an attack, could constitute a sanctions violation, including in cases where a non-U.S. person causes a U.S. person to violate sanctions (in this case, to make the ransom payment to an SDN on behalf of the U.S. victim).

3. Art Advisory

One month later, on October 30, 2020, OFAC issued an “Advisory and Guidance on Potential Sanctions Risks Arising from Dealings in High-Value Artwork.” The Advisory underscores the sanctions risk posed by dealing in high value artwork—in particular artwork valued in excess of $100,000—due to the prevalence of SDNs’ participation in the market. The Advisory details how SDNs take advantage of the anonymity and confidentiality characteristic of the market to evade sanctions and even provides several examples of SDNs—including a top Hizballah donor, two Russian oligarchs, and a sanctioned North Korean art studio—who have taken advantage of the high-end art market to evade sanctions.

The Advisory further encourages U.S. persons and companies, including galleries, museums, private collectors, and art brokers, to implement risk-based compliance programs to mitigate against these risks. Further, and significantly, the Advisory clarifies that although the import and export of artwork is exempted from regulation under the Berman Amendment to IEEPA (which exempts from sanctions the export of information), OFAC does not interpret this exemption to encompass the intentional evasion of sanctions via the laundering of financial assets through the purchase and sale of high value artwork.

4. Hizballah Designations

OFAC has continued to put pressure on Hizballah through the imposition of sanctions in the second half 2020, particularly in the wake of the explosion at the Port of Beirut in August 2020, which highlighted the corruption and mismanagement that had become endemic to the Lebanese government. By the end of 2020, over 95 Hizballah-affiliated individuals and entities had been designated by OFAC since 2017. On September 8, 2020, OFAC designated two Lebanese government ministers for having “provided material support to Hizballah and engaged in corruption.” Both ministers reportedly took bribes from Hizballah in return for granting the organization political and business favors. Fewer than two weeks later, on September 17, 2020, OFAC designated two Lebanese companies for being owned or controlled by Hizballah, as well as a senior Hizballah official, who is “closely associated” with the companies. The companies, which are controlled by Hizballah’s Executive Council, reportedly had been used by Hizballah to evade sanctions and conceal the organization’s funds. One month later, on October 22, 2020, OFAC designated two members of Hizballah’s Central Council, which is the body that elects the organization’s ruling Shura Council.

On September 2, 2020, the United States designated the chief prosecutor of the International Criminal Court (“ICC”), as well as an ICC senior official, to the SDN List, the first promulgation of sanctions pursuant to a June 11, 2020 Executive Order—which we discussed in more detail in our 2020 Mid-Year Sanctions and Export Controls Update—declaring the ICC to be a threat to the national security of the United States due to its ongoing investigation of U.S. military actions in Afghanistan.

On January 21, 2020, a court in the Southern District of New York issued a preliminary injunction against the government, enjoining it from enforcing aspects of the Executive Order and its implementing regulations (that had been published on September 30, 2020). In so doing, the court determined that, by preventing U.S. persons and organizations from providing advice or other speech-based support to the designated individuals, the restrictions infringe on the plaintiffs’ constitutional right to free speech. Although the court has yet to issue a final ruling, the case may become mooted if the Biden-Harris administration revokes or allows the Executive Order to lapse, as commentators speculate.

III. U.S. Export Controls

Although China was often an explicit or implicit focus of many developments in U.S. export controls, 2020 was also year of significant innovation more broadly in export controls, especially those administered by the Department of Commerce. Each innovation has brought with it added complexities for compliance.

A. Commerce Department

1. Emerging Technology Controls

The Department of Commerce’s Advanced Notice of Proposed Rule Making on Emerging Technologies in late 2018 sparked strong concern within many economic sectors that the Department was planning to swiftly act on its mandate under the Export Control Reform Act (“ECRA”) of 2019 to identify and impose new and broadly framed controls concerning emerging technologies. However, as 2020 began—and even before the coronavirus took hold—it became clear that Commerce, for a few reasons, planned to take it slow. Commerce took well into late 2019 to analyze the public comments and to host many non-public meetings with a range of private sector actors, interagency, and non-government stakeholders on emerging technology controls. Among the key takeaways Commerce has shared publicly is its determination that emerging technology controls need to be tailored narrowly, and that Commerce needed to persuade other countries to adopt similar export controls to minimize the impact on the U.S. private sector companies and other organizations that are developing them.

The United States has several different ways to promote multilateral controls, including through its participation in the 42 member Wassenaar Arrangement (“WA”). Through its inter-plenary work in 2019, the participating states of the WA achieved consensus to impose new controls on six specific technologies at the December 2019 Wassenaar Arrangement Plenary, and in October 2020, Commerce added new controls on: hybrid additive manufacturing (AM)/computer numerically controlled (“CNC”) tools; computational lithography software designed for the fabrication of extreme ultraviolet (“EUV”) masks; technology for finishing wafers for 5 nm production; digital forensics tools that circumvent authentication or authorization controls on a computer (or communications device) and extract raw data; software for monitoring and analysis of communications and metadata acquired from a telecommunications service provider via a handover interface; and sub-orbital craft. Due to COVID, the Wassenaar Arrangement did not convene its annual plenary in December 2020 and consequently no new controls were adopted. However, the United States will Chair the General Working Group of Wassenaar in 2021, and given the significant work completed by Commerce and other U.S. Government agencies over the past several years to identify emerging technologies for control, the United States will be well-positioned to push for new controls over the course of 2021 for adoption at the Plenary meeting in December 2021.

Commerce made one exception in 2020 to its policy of waiting to build international consensus before imposing U.S. controls on emerging technologies. On January 3, 2020 it imposed new export controls on artificial intelligence software that is specially designed to automate the analysis of geospatial imagery in response to emergent national security concerns related to the newly covered software. As a result, a license from Commerce is now required to export the geospatial imagery software to all countries, except Canada, or to release the software to foreign nationals employees working with the software in the United States. To impose the new control, Commerce deployed a rarely used tool for temporarily controlling the export of emerging technologies—the 0Y521 Export Controls Classification Number (“ECCN”). This special ECCN category allows BIS to impose export restrictions on previously uncontrolled items that have “significant military or intelligence advantage” or when there are “foreign policy reasons” supporting restrictions on its export. In early 2021, Commerce opted to extend this unilateral control for another year while it continues to work towards consensus with other countries to impose parallel controls.

2. Foundational Technology Controls

ECRA also mandates Commerce to identify and impose new export controls on foundational technologies, and Commerce released an Advance Notice of Proposed Rule-making (“ANPRM”) on this topic in August 2020. However, in contrast to its more open-ended ANPRM on emerging technologies, in this request for comments, Commerce suggested that new, item-based controls on foundational technologies may not be warranted provided that their export is being controlled to certain destinations through other means. Specifically, Commerce noted that the expanded list of ECCNs it added to the EAR’s Military End User controls, which includes technologies that might be used by the governments of China, Russia, and Venezuela to build their respective defense industrial capabilities, could be deemed foundational technologies. Commerce also noted that it might draw on recent DOJ enforcement actions to help identify technologies that other countries have deemed critical enough to target for economic espionage. Overall, the approach taken in this ANPRM suggests that Commerce will be looking for other ways to impose controls on foundational technologies that would be less sweeping than the near globally-applicable, item-based licensing requirements it has imposed on the emerging technologies it has identified to date.

3. Removal of CIV License Exception

On June 29, 2020, as part of its efforts to curtail the export of sensitive technologies to countries that have policies of military-civil fusion, Commerce removed the license exception Civil End Users (“CIV”) from Part 740 of the EAR, which previously allowed eligible items controlled only for National Security (NS) reasons to be exported or reexported without a license for civil end users and civil end uses in certain countries.

NS controls are BIS’s second most-frequently applied type of control, applying to a wide range of items listed in all categories of the Commerce Control List (“CCL”). The countries included in this new restriction are from Country Group D:1, which identifies countries of national security concern for which the Commerce Department will review proposed exports for potential contribution to the destination country’s military capability. D:1 countries include China, Russia, Ukraine, and Venezuela, among others. By removing License Exception CIV, the Commerce Department now requires a license for the export of items subject to the EAR and controlled for NS reasons to D:1 countries. As with the expansion of the Military End Use and End User license requirements described above, the Commerce Department has stated that the reason for the removal of License Exception CIV is the increasing integration of civilian and military technological development pursued by countries identified in Country Group D:1, making it difficult for exporters or the U.S. Government to be sufficiently assured that U.S.-origin items exported for apparent civil end uses will not actually also be used to enhance a country’s military capacity contrary to U.S. national security interests.

4. Direct Product Rule Change

Although Commerce’s initial expansion of its Entity List-based controls targeted Huawei, it may point the way toward other Entity List-based and new end-user and end use-based licensing controls in 2021. As noted above, to further constrain Huawei and its affiliates, Commerce created a new Entity List-specific rule that significantly expands the Direct Product Rule to include a wide range of software, technology, and their direct products, many of which used to develop and produce semiconductor and other items that Huawei uses in its products. We expect further experimentation with Entity List-based controls in 2021, including potentially, lowered the “De Minimis Rule” thresholds, which could greatly expand the range of foreign products incorporating controlled U.S. content that would require Commerce licensing when specific parties are involved.

5. Expanded Crime Control and Human Rights Licensing Policy

Commerce also focused efforts in 2020 on a review and update of controls imposed on U.S. origin items under its Crime Control policy. Most of the items controlled by the EAR for Crime Control reasons today are items that have been used by repressive regimes for decades, such as riot gear, truncheons, and implements of torture. In July 2020, Commerce issued a Notice of Inquiry signaling its intention to update the list of items to include advanced technology such as facial recognition software and other biometric surveillance systems, non-lethal visual disruption lasers, and long range acoustic devices. While, as of this writing, Commerce continues to work through the comments submitted in response to the Notice, on October 6, 2020 it imposed new controls on exports of water cannon systems for riot and crowd control to implement a specific mandate from Congress to restrict the export of commercial munitions to the Hong Kong Police Force.

On the same day, Commerce amended the EAR to reflect a new licensing policy to deny the export of items listed on the Commerce Control List for crime control reasons to countries where there is either civil disorder or it assesses that there is a risk that items will be used in the violation or abuse of human rights. This amendment changed the Commerce Department’s licensing policy in two ways. First Commerce licensing officers no longer require evidence that the government of an importing country has violated internationally recognized human rights. Instead, BIS will consider whether an export could enable non-state actors engage in or enable the violation or abuse of human rights.

Second, Commerce noted that it would extend its Crime Control review policy to proposed exports of other items that are not specifically listed on the CCL for Crime Control reasons. This second expansion is particularly noteworthy because it expressly allows Commerce licensing officers to consider human rights concerns when reviewing proposed exports of many other items used by repressive governments today to surveil and stifle dissent or engage in other kinds of human rights violations, such as more generally benign telecommunications, information security, and sensor equipment.

B. State Department

1. Directorate of Defense Trade Controls (DDTC)

There were far fewer legal or regulatory developments at DDTC than occurred at Commerce in 2020, and DDTC appeared to focus much more effort on several practice-related changes. Indeed, DDTC spent significant time to launch a single digital platform for the processing of registrations, license applications, and correspondence requests, among other submissions.

The most significant rule change came in January when DDTC issued its final rule to revise Categories I, II, and III of the United States Munitions List to remove from Department of State jurisdiction the controls on certain firearms, close assault weapons, and combat shotguns, other guns and armament, and ammunition. The Department of Commerce now regulates the export and reexport of the items transferred to the Commerce Control List going forward.

DDTC also implemented a long awaited change to the ITAR’s export licensing treatment of encrypted communications on March 25, 2020. The rule change affords similar (but not thesame) treatment to encrypted communications as does the EAR and should make it easier for companies and other organizations to use Internet and international cloud networks to transmit and store encrypted ITAR technical data without triggering licensing requirements.

DDTC made greater use in 2020 of Frequently Asked Questions to provide guidance on a range of topics. Most significantly, the DDTC shared, in real time, its evolving policy on whether U.S. person nationals working outside of the United States and providing defense services need to maintain separate registrations and obtain ITAR authorizations in a series of FAQs published on January 8, February 21, and April 4. DDTC also issued FAQs providing guidance on its recently revamped “By or For” license exemption, 22 CFR § 126.4, which will make it significantly easier for U.S. Government contractors to export defense articles and defense services without ITAR authorization when these exports are being done at the direction of U.S. Government agencies and meet certain criteria. On October 20, DDTC used an FAQ to provide an explanation of a frequently invoked but not always clearly understood licensing rule referred to as the ITAR “see-through rule.” Curiously, DDTC found it necessary to inform the exporting public in a May FAQ that Puerto Rico is in fact a U.S. territory, along with American Samoa, Guam, and the U.S. Virgin Islands, and did not require ITAR licensing.

2. Bureau of Democracy, Human Rights, and Labor

On September 30, the State Department Bureau of Democracy, Human Rights, and Labor issued due diligence guidance on transactions that might result in the sale of products and services with surveillance capabilities foreign government end-users (hereinafter “Guidance”). The non-binding Guidance tracks and applies human rights diligence international standards set out in the United Nations Guiding Principles and Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises to surveillance product and service transactions. State’s surveillance guidance identifies “red flags” members of the regulated community should watch for prior to entering into a transaction with a government end-user, along with suggested safeguards—such as contractual provisions and confidential reporting mechanisms—to detect and halt rights abuses should they occur. Although the Guidance does not break new ground for many large manufacturers of these products that already incorporate human rights-related diligence in their evaluation of proposed sales of these products and services, sensitive jurisdictions, mid- and smaller-size firms might find it helpful. Especially for resource-constrained entities that may not know what resources might be available to inform their due diligence, the Guidance identifies specific U.S. and non-U.S. Government publications and tools. For those companies not yet conducting human rights diligence on transactions involving these products, the Guidance helps set the bar on the expectations that investors, non-government organizations, and other stakeholders have for their business conduct going forward.

IV. European Union

A. EU-China Relationship

In 2020, the EU charted a somewhat different course than Washington in its economic relations with China. It finalized a comprehensive agreement on investment focused on enabling an increase in outbound investment in China from the EU, and at the same time, EU and its member states enhanced their framework for reviewing foreign direct investment (“FDI”) to address concerns regarding, inter alia, Chinese investments in certain sectors in the EU.

On December 30, 2020, the EU and China concluded negotiations for a Comprehensive Agreement on Investment (“CAI”). China has committed to a greater level of market access for EU investors, including opening certain markets for foreign investments from the EU for the first time. China has also made commitments to ensure fair treatment of investors from the EU, with the EU hoping for a level playing field in China (specifically vis-à-vis state owned enterprises), transparency of subsidies granted and rules against the forced transfer of technologies. China has also agreed to ambitious provisions on sustainable development, including certain commitments on forced labor and the ratification of certain conventions of the International Labor Organization. The EU has committed to a high level of market entry for Chinese investors and that all rules apply in a reciprocal manner. As next steps, China and the EU will be working towards finalizing the text of CAI, before then being submitted for approval by the EU Council and the European Parliament.

On October 11, 2020, Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for screening of foreign direct investments into the EU (the “EU Screening Regulation”) entered into force, marking the beginning of EU-wide coordination regarding FDIs among EU member states and the European Commission. While FDI screening and control remains a member state competency, the EU Screening Regulation increases transparency and awareness of FDI flows into the EU. (For details on the EU Screening Regulation and the newly applicable EU-wide cooperation process, see our respective client alert of March 2019.)

A notable case of enforcing FDI control in particular with respect to China is the prohibition by the German government in December 2020 of the indirect acquisition of a German company with expertise in satellite/radar communications and 5G millimeter wave technology by a Chinese state-owned defense group. Germany has seen an increased number and complexity of foreign investments and takeover (attempts) over the past couple of years, especially by Chinese investors, which has resulted in a continuous tightening of FDI rules in Germany. For additional details on the developments in 2020 with regard to the German FDI rules, including an overview of the investment screening process in Germany, please refer to our client alerts in May 2020 and November 2020.

B. EU Sanctions Developments

Currently, the EU has over forty different sanctions regimes or “restrictive measures” in place, adopted under the EU’s common foreign and security policy (“CFSP”). Some are mandated by the United Nations Security Council, whereas others are adopted autonomously by the EU. They can broadly be categorized in EU Economic and EU Financial Sanctions. Further, EU member states may implement additional sanctions. EU economic sanctions, broadly comparable to U.S. sectoral sanctions, are restrictive measures designed to restrict trade, usually within a particular economic sector, industry or market—e.g., the oil and gas sector or the defense industry (“EU Economic Sanctions”).

EU financial sanctions are restrictive measures taken against specific individuals or entities that may originate from a sanctioned country, or may have committed a condemned activity (“EU Financial Sanctions”). These natural persons and organizations are identified and listed by the EU in the EU Consolidated List of Persons, Groups and Entities Subject to EU Financial Sanctions (“EU Consolidated List”), broadly comparable to U.S. Specially Designated Nationals (“SDN”) listings.

It is noteworthy that, on a regular basis, third-party countries align with EU Sanctions, such as recently North Macedonia, Montenegro, Albania, Iceland and Norway with regards to the Belarus Sanctions.

For a full introduction into EU Sanctions, including the EU Blocking Statute, as well as, exemplary, the German export control regime, please take a look at a recent GDC co-authored publication, the International Comparative Legal Guide to Sanctions 2020.

While EU sanctions are enforced by EU member states, the EU Commission has announced that it plans to take steps to strengthen sanctions enforcement. On January 19, 2021, the EU Commission published a Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions titled “The European economic and financial system: fostering openness, strength and resilience” (the “Communication”). The Communication describes EU sanctions as “key instrument” playing a “critical role in upholding the EU’s values and in projecting its influence internationally”. To improve the design and effectiveness of EU sanctions, the EU Commission will from 2021 will conduct a review of practices that circumvent and undermine sanctions. It will further develop a database, the Sanctions Information Exchange Repository, to enable “prompt reporting and exchange of information between the Member States and the Commission on the implementation and enforcement of sanctions.” In addition, the Commission is setting up an expert group of Member States’ representative on sanctions and extra-territoriality and intends to improve coordination on certain cross-border sanctions-related matters between Member States. The Commission will also work with Member States to establish a single contact point for enforcement and implementation issues when there are cross-border implications.

To supervise the harmonized enforcement of EU sanctions, the EU Commission—among other measures—plans to create a dedicated system to report sanctions’ evasion anonymously, including a confidential whistleblowing system.

1. EU Human Rights Sanctions

On December 7, 2020, the Foreign Affairs Council of the Council of the European Union, adopted Decision (CFSP) 2020/1999 and Regulation (EU) 2020/1998, together establishing the EU’s first global and comprehensive human rights sanctions regime (“EU Human Rights Sanctions”) (as discussed in detail in our recent client alert). The EU Human Rights Sanctions will allow the EU to target individuals and entities responsible for, involved in or associated with serious human rights violations and abuses and provides for the possibility to impose travel bans, asset freeze measures and the prohibition of making funds or economic resources available to those designated.

EU Human Rights Sanctions mirror in parts the U.S. Magnitsky Act of 2012, and its 2016 expansion, the U.S. Global Magnitsky Human Rights Accountability Act as well as similar Canadian and United Kingdom sanction regimes. Notably, in contrast to the U.S. and Canadian human rights sanctions regimes, and similar to the United Kingdom human rights sanctions regime, the list of human rights violations does not include corruption.

While human rights violations have been subject to EU sanctions in the past, imposed on the basis of a sanctions framework linked to specific countries, conflicts or crises, the newly adopted EU Human Rights Sanctions are a significantly more flexible tool for the EU to respond to significant human rights violations. Although no specific individual or entity have yet been designated under the EU human rights sanctions, companies active in the EU should be mindful of this new sanctions regime and take it into consideration in their compliance efforts.

On December 17, 2020, the European Commission published the Commission Guidance Note of the Implementation of Certain Provisions of Council Regulation (EU) 2020/1998 (“Human Rights Guidance Note”) regarding the implementation of certain provisions of the EU Human Rights Sanctions, advising on the scope and implementation in the form of 13 “most likely” questions that may arise and the respective answers.

2. EU Cyber Sanctions

On May 17, 2019, the EU established a sanctions framework for targeted restrictive measures to deter and respond to cyber-attacks that constitute an external threat to the EU or its Member States. The framework was expounded in two documents, Council Decision (CFSP) 2019/797 and Council Regulation 2019/796 (as discussed in detail in our previous client alert). In July 2020, the EU imposed its first ever sanctions listing related to cyber-attacks against Russian intelligence, North Korean and Chinese firms over alleged cyber-attacks. The EU targeted the department for special technologies of the Russian military intelligence service for two cyber-attacks in June 2017. Four individuals working for the Russian military intelligence service were sanctioned for their alleged participation in an attempted cyber-attack against the Organization for the Prohibition of Chemical Weapons in the Netherlands in April 2018. Further, North Korean company Chosun Expo was sanctioned due to suspicions of it having supported the Lazarus Group, which is deemed responsible for a series of major cyber-attacks and cybercrime activities worldwide. In addition, Chinese firm Haitai Technology Development and two Chinese individuals were sanctioned. The EU alleged cyber-attacks aimed at stealing sensitive business data from multinational companies. On October 22, 2020, the EU used the framework to impose further sanctions on two Russian officials and part of Russia’s military intelligence agency (GRU) over a cyberattack against the German parliament in 2015.

The Council of the EU recently extended the EU Cyber Sanctions until May 18, 2021.

3. EU Chemical Weapons Sanctions

On October 12, 2020, the European Council decided to extend the sanctions concerning restrictive measures against the proliferation and use of chemical weapons by one year, until October 16, 2021. Such EU Chemical Weapons Sanctions were initially introduced in 2018 with the aim to counter the proliferation and use of chemical weapons which pose an international security threat. The restrictive measures consist of travel bans and asset freezes. Further, persons and entities in the EU are forbidden from making funds available to those listed. Currently, restrictive measures are imposed on nine persons and one entity. Five of the persons are linked to the Syrian regime and the sanctioned entity is understood to be the Syrian regime’s main company for the development of chemical weapons. The remaining four of the nine persons are linked to the 2018 attack in Salisbury using the toxic nerve agent Novichok.

4. EU Iran Sanctions & Judicial Review

In January 2020, France, Germany and the UK (the “E3”) issued a joint statement reaffirming their support to the JCPOA, repeating their commitment throughout the year, and roundly rejecting the United States’ attempts to trigger a UN sanctions snapback. In September 2020, the E3 also warned the United States that its claim to have the authority to unilaterally trigger the so-called JCPOA snap-back mechanism that would have led to reimposing UN mandated nuclear-related sanctions on Iran would have no effect in law. On December 21, 2020, a Meeting of the E3/EU+2 (China, France, Germany, the Russian Federation, the United Kingdom, and the High Representative of the European Union for Foreign Affairs and Security Policy) and the Islamic Republic of Iran stressed that JCPOA remains a key element of the global nuclear non-proliferation architecture and a substantial achievement of multilateral diplomacy that contributes to regional and international security. The Ministers reiterated their deep regret towards the U.S. withdrawal and agreed to continue to dialogue to ensure the full implementation of the JCPOA. Finally, the Meeting also acknowledged the prospect of a return of the U.S. to the JCPOA, and expressed they were ready to positively address this move in a joint effort.

Regarding litigation, on October 6, 2020, the Court of Justice of the European Union (“CJEU”) gave its long-awaited judgment in Bank Refah Kargaran v. Council (C-134/19 P), an appeal against the judgment of the General Court in T-552/15, raising the question of the EU Courts’ jurisdiction in sanctions damages cases. By this judgment, the General Court dismissed the action by Bank Refah Kargaran seeking compensation for the damage it allegedly suffered as a result of the inclusion in various lists of restrictive measures in respect of the Islamic Republic of Iran.

In its judgment, the CJEU ruled that the General Court erred in law by declaring that it lacked jurisdiction to hear and determine the action for damages for the harm allegedly suffered by the appellant as a result of the Common Foreign and Security Policy (“CFSP”) decisions adopted under Article 29 TEU. According to the CJEU, and in sync with Advocate General Hogan’s Opinion delivered in that case in May 2020, the General Court’s jurisdiction extends to actions for damages in matters relating to the CFSP. In fact, it is to be understood that jurisdiction is given for the award of damages arising out of both targeted sanctions decisions and regulations. However, the CJEU dismissed the appeal on account of the lack of an unlawful conduct capable of giving rise to non-contractual liability on the part of the EU and upheld the General Court’s interpretation that the inadequacy of the statement of reasons for the legal acts imposing restrictive measures is not in itself sufficiently serious as to activate the EU’s liability

5. EU Venezuela Sanctions

The EU’s Venezuela Sanctions include an arms embargo as well as travel bans and asset freezes on listed individuals, targeting those involved in human rights violations, and those undermining democracy or the rule of law.

On January 9, 2020, the EU’s High Representative, Josep Borrell, declared that the EU is “ready to start work towards applying additional targeted measures against individuals” involved in the recent use of force against Juan Guaidó, the president of Venezuela’s National Assembly, and other lawmakers to impede their access to the National Assembly on January 5, 2020.

On November 12, 2020, the European Council extended sanctions on Venezuela until November 14, 2021, and replaced the list of designated individuals, which now includes 36 listed individuals in official positions who are deemed responsible for human rights violations and for undermining democracy and the rule of law in Venezuela.

Recently, the EU has issued a Declaration stating that it is prepared to impose additional targeted sanctions in response to the decision of the Venezuelan National Assembly to assume its mandate on January 5, 2021, on the basis of non-democratic elections.

6. EU Russia Sanctions & Judicial Review

Since March 2014, the EU has progressively imposed increasingly harsher economic and financial sanctions against Russia in response to the destabilization of Ukraine and annexation of Crimea. EU Russia Economic Sanctions continue to include an arms embargo, an export ban on dual-use goods for military use or military end-users in Russia, limited access to EU primary and secondary capital markets for major Russian state-owned financial institutions and major Russian energy companies, and limited Russian access to certain sensitive technologies and services that can be used for oil production and exploration. On December 17, 2020, the EU renewed such sanctions for six months. The EU Russia Economic Sanctions imposed in response to the annexation of Crimea and Sevastopol have been extended until June 23, 2021.

Russia has imposed counter-measures in response to EU Russia Economic and Financial Sanctions. In particular, Russia decided to ban agricultural imports from jurisdictions that participated in sanctions against Moscow. The measures included a ban on fruit, vegetables, meat, fish, milk and dairy products. On December 22, 2020, in response to new EU Russia Financial Sanctions imposed on Russians officials in connection with the poisoning of opposition leader Alexei Navalny, Russia imposed additional travel bans on representatives of EU countries and institutions.

As to related judicial review, on June 25, 2020, the CJEU dismissed appeals brought by VTB Bank (C-729/18 P) and Vnesheconombank (C-731/18 P) against the General Court’s judgments confirming their inclusion in 2014 in the EU’s sanctions list, which restricted the access of certain Russian financial institutions to the EU capital markets. The Court inter alia remarked that the measures were justified and proportionate because they were capable of imposing a financial burden on the Russian government, because the government might need to have to rescue the banks in the future.

On September 17, 2020, the CJEU rejected an appeal (C-732/18 P) brought by Rosneft (a Russian oil company) against the General Court’s decision to uphold its 2014 EU listing (T‑715/14). The CJEU confirmed the General Court’s assessment that the measures were appropriate to the aims they sought to attain. More specifically, given the importance of the oil sector to the Russian economy, there was a rational connection between the restrictions on exports and access to capital markets and the objective of the sanctions, which was to put pressure on the government, and to increase the costs of Russia’s actions in Ukraine.

Following the same line of reasoning as in a series of previous judgments by the EU Courts in 2018[1] and 2019,[2] the General Court decided in a number of new cases that certain individual listings on the EU’s Ukraine sanctions list (which, inter alia, targets those said to be responsible for the “misappropriation of State funds”) are unlawful because the EU has not properly verified whether the decisions of the Ukrainian authorities contained sufficient information or that the procedures respected rights of defence. More specifically:

On December 16, 2020, the General Court annulled the 2019 designation of Mykola Azarov, the former Prime Minister of Ukraine (T-286/19). Mr. Azarov is no longer subject to EU sanctions after his delisting in March 2020. The Court ruled that the Council of the European Union had made an error of assessment by failing to establish that the Ukrainian judicial authorities had respected Mr Azarov’s rights of the defence and right to judicial protection.

Earlier in 2020, on June 25, 2020, the General Court issued its judgment in Case T-295/19 Klymenko v Council, in which the Court held that it was not properly determined whether Mr Klymenko’s rights of defence were respected in the ongoing criminal proceedings against him in Ukraine. In particular, the Council had not responded to or considered Mr Klymenko’s arguments such as that the pre-conditions for trying him in his absence had not been fulfilled, he had been given a publicly appointed lawyer who did not provide him with a proper defence, the Ukrainian procedure did not permit him to appeal against the decision of the investigating judge, and he was not being tried within a reasonable time. Mr Klymenko was relisted in March 2020 and so remains on the EU sanctions list.

Furthermore, on September 23, 2020, with its Judgments in cases T-289/19, T-291/19 and T-292/19, the General Court annulled the 2019 designation of Sergej Arbuzov, the former Prime Minister of Ukraine, Victor Pshonka, former Prosecutor General and his son Artem Pshonka, respectively. All remain on the EU’s sanctions list, because their designations were renewed in March 2020.

7. EU Belarus Sanctions

On August 9, 2020, Belarus conducted presidential elections and, based on what were considered credible reports from domestic observers, the election process was deemed inconsistent with international standards by the EU. In light of these events and acting with partners in the United States and Canada, the EU foreign ministers agreed on the need to sanction those responsible for violence, repression and the falsification of election results. In addition, EU foreign ministers called on Belarusian authorities to stop the disproportionate violence against peaceful protesters and to release those detained.

Shortly afterwards, on August 19, 2020 the EU heads of state and government met to discuss the situation and, in declarations to the press, President Charles Michel affirmed that the EU does not recognize the election results presented by the Belarus authorities and that EU leaders condemned the violence against peaceful protesters. On this occasion, EU leaders agreed on imposing sanctions on the individuals responsible for violence, repression, and election fraud. However, Cyprus opposed the adoption of measures by insisting that the EU should first agree on the adoption of restrictive measures against Turkey. This episode highlighted that a single EU member state or small group of EU member states can complicate EU foreign policy goals and push for trade-offs on unrelated matters.

Yet, restrictive measures were effectively imposed on October 2, 2020 against 40 individuals identified as responsible for repression and intimidation against peaceful demonstrators, opposition members and journalists in the wake of the 2020 presidential election, as well as for misconduct of the electoral process. The restrictive measures included a travel ban and asset freezing.

On November 6, 2020, the set of restrictive measures was expanded, and the Council of the EU added 15 members of the Belarusian authorities, including Alexandr Lukashenko, as well as his son and National Security Adviser Viktor Lukashenko, to the list of individuals sanctioned.

Lastly, on December 17, 2020, the set of restrictive measures was further expanded in order to adopt 36 additional designations, which targeted high-level officials responsible for the ongoing violent repression and intimidation of peaceful demonstrators, opposition members and journalists, among others. The listings also target economic actors, prominent businessmen and companies benefiting from and/or supporting the regime of Aleksandr Lukashenko. Therefore, after three rounds of sanctions on Belarus, there are currently a total of 88 individuals and 7 entities designated under the sanctions’ regime in place for Belarus.

8. EU North Korea Sanctions

On July 30, 2020, the EU North Korea Economic Sanctions targeting North Korea’s nuclear-related, ballistic-missile-related or other weapons of mass destruction-related programs or for sanctions evasion were confirmed, and will continue to apply for one year, until the next annual review.

9. EU Turkey Sanctions

On December 10, 2020, EU leaders agreed to prepare limited sanctions on Turkish individuals over an energy exploration dispute with Greece and Cyprus, postponing any harsher steps until March 2021 as countries sparred over how to handle Ankara.

Josep Borrell, the High Representative of the European Union for Foreign Affairs and Security Policy, is now expected to come forward with a broad overview report on the state of play concerning the EU-Turkey political, economic and trade relations and on instruments and options on how to proceed, including on the extension of the scope of the above-mentioned decision for consideration at the latest at the March 2021 European Council.

10. EU Syria Sanctions – Judicial Review

On December 16, 2020, the General Court dismissed the applications of two Syrian businessmen, George Haswani (T-521/19) and Maen Haikal (T-189/19), to annul their inclusion on the EU’s Syria sanctions list. In both cases, the General Court held that the Council of the European Union had provided a sufficiently concrete, precise and consistent body of evidence capable of demonstrating that both Applicants are influential businessmen operating in Syria.

Similarly, on July 8, 2020, the General Court rejected an application by Khaled Zubedi to annul his inclusion on the EU’s Syria sanctions (T-186/19) and on July 9, 2020 the CJEU rejected an appeal by George Haswani (C-241/19 P). In both cases the Courts concluded that the Council of the European Union could appropriately demonstrate that both men were leading businessmen operating in Syria and that neither had rebutted the presumption of association with the regime of President Assad. Also, on December 2, 2020, the General Court dismissed Nader Kalai’s similar application of annulment (T-178/19).

In addition, maintaining its established position on the subject, the CJEU dismissed a series of appeals brought before it by 6 Syrian entities, Razan Othman (Rami Makhlouf’s wife), and Eham Makhlouf (vice-president of one of the listed entities) challenging the General Court’s decision to uphold their 2016-2018 listings (see cases C-350/19 P; C‑349/19 P, C-348/19 P, C‑261/19 P, C‑260/19 P, C‑159/19 P, C‑158/19 P and C‑157/19 P, published on October 1, 2020). The CJEU held that the General Court was right to uphold the appellants’ listings because the EU’s Syria sanctions include membership of the Makhlouf family as a criterion on which a designation can be based. Considering that the Appellants were all found to be wholly or by majority owned by Rami Makhlouf, their assets were liable to be frozen without the need to demonstrate that they actively supported or had derived some benefit from the regime.

11. EU Egypt Sanctions – Judicial Review

On December 3, 2020, the CJEU delivered its ruling on Joined Cases C‑72/19 P and C‑145/19 P, concluding that the sanctions on deceased former Egyptian leader Hosni Mubarak and several members of his family should be lifted because of due process errors. The CJEU found that the Council of the EU took as its basis for listing Mr. Mubarak and his family members the mere existence of judicial proceedings against them in Egypt for misappropriation of State funds, i.e., the decision of an authority of a third State. As the Council of the EU took assurances from Egyptian authorities that these rights were being observed when it should have independently confirmed that the legal protections were in place before designating the individuals, the CJEU found that the Council of the EU failed to verify whether that decision had been adopted in accordance with the rights of the defense and the right to effective judicial protection of the individuals listed.

Nevertheless, the asset freeze on the Mubarak family members will remain in place as the judgment only overturns the Council of the EU’s decisions to impose sanctions on the family in 2016, 2017 and 2018. The 2019 and 2020 renewals of the original legal framework are still undergoing litigation.

C. EU Member State Export Controls

1. Belgium

On June 26, 2020 the Belgian Federal Parliament adopted of a resolution urging the government to prepare a list of countermeasures against Israel in case it annexes the occupied Palestinian territories.

2. France

On June 3, 2020, the Court of Appeal of Paris (international commercial chamber) issued its Judgment in SA T v Société N. The Court of Appeal dismissed an appeal by a French contractor seeking the annulment of an arbitral tribunal’s award on the grounds that it had breached French international public policy by failing to take into account UN, EU and US sanctions. The tribunal had ordered the contractor to pay €1 million to an Iranian company following a dispute over the conversion of a gas field into an underground storage facility. The Court of Appeal concluded that UN and EU sanctions regulations constitute “mandatory overriding provisions.”

On July 24, 2020, the French Cour de Cassation lodged a request for a preliminary ruling to the CJEU, regarding the interpretation of UN and EU Iran sanctions, and more specifically on questions concerning creditors’ ability to take enforcement action against assets frozen by EU sanctions regulations (registered under Case C-340/20).

The French Court referred the questions to the CJEU in order to decide appeals brought in case Bank Sepah v Overseas Financial Ltd and Oaktree Finance Ltd.

On December 9, 2020, the French government published an Ordinance n° 2020-1544 in the Official Journal, which expands controls on digital assets as part of efforts to combat money laundering and terrorist financing.

3. Germany

The German Federal Court of Justice (Bundesgerichtshof) (“BGH”) decided on August 31, 2020, that the procurement of materials for a foreign intelligence service, while circumventing EU Sanctions, fulfills the elements of a crime under section 18 para. 7 No. 1 of the Foreign Trade and Payments Act (Aussenwirtschaftsgesetz) (“AWG”). Espionage or affiliation with an intelligence service are not necessary to act “for the intelligence service of a foreign power.”

In the case, a man sold machine tools to Russian companies for around €8 million in seven cases between 2016 and 2018. The man’s actual contractual partner—a member of a Russian intelligence service—subsequently supplied the machines to a Russian state-owned arms company for military use. The arms company operates in the field of carrier technology and develops cruise missiles. The machine tools are considered dual-use technology, and the sale and export of such items to Russia is prohibited since 2014 under the EU Russia Sanctions, specifically Regulation (EU) 883/2014 as amended.

The BGH decided that it is sufficient if the delivery of the machines is a result of the perpetrator’s involvement in the procurement structure of foreign intelligence services. An organizational integration of the perpetrator into the foreign intelligence service is not required to justify the higher penalty of section 18 para. 7 No. 1 AWG (imprisonment of not less than one year) compared to the regular sentencing range of section 18 para. 1 AWG (imprisonment from three months up to five years) imposed for embargo violations under the AWG.

4. Latvia / Lithuania / Estonia

On August 31, 2020, Latvia, as well as Lithuania and Estonia, imposed travel bans on 30 officials including the President of Belarus Alexander Lukashenko, on the basis of their contribution to violations of international electoral standards and human rights, as well as repression against civil society and opposition to democratic processes. Following this designation, on September 25, 2020, the aforementioned EU Member States added 98 Belarusian officials to this list.

In November 2020, the aforementioned EU Member States proceeded to further designations. More specifically, Estonia and Lithuania imposed travel bans on an additional 28 Belarusian officials, and Latvia imposed a travel ban on 26 officials, all of whom are said to have played a central role in falsifying election results and using violence against peaceful protesters in Belarus. Overall, Latvia has now listed a total of 159 officials, who are banned from entering its territory indefinitely. Estonia and Lithuania have both listed 156 officials in total.

In February 2020, the Administrative Regional Court in Riga, Latvia rejected a request to suspend a ban issued by Latvia’s National Electronic Mass Media Council on the broadcasting of 9 Russian television channels due to the designation of their co-owner, Yuriy Kovalchuck, who is listed pursuant to Council Regulation (EU) 269/2014 (undermining or threatening the territorial integrity, sovereignty and independence of Ukraine).

5. Luxembourg

On December 27, 2020, a law allowing Luxembourg to implement certain sanctions in financial matters adopted by the UN and the EU entered into force. The restrictive measures in financial matters envisaged by the law include asset freeze measures, prohibitions/restrictions of financial activities and financial services to designated people, entities or groups.

The measures can be imposed on Luxembourg nationals (residing or operating in or outside Luxembourg), legal persons having their registered office, a permanent establishment or their center of main interests in Luxembourg and which operate in, from or outside the territory, as well as all other natural and legal persons operating in Luxembourg.

Under this legislation, domestic supervisory and regulatory bodies are responsible for supervising the implementation of the law. This includes (i) the power to access any documentation; (ii) request information from any person; (iii) request disclosure of communications from regulated persons; (iv) carry out on-site inspections; and (v) refer information to the State prosecutor for criminal investigation.

Failure to comply with the newly adopted restrictive measures shall be punishable by criminal penalties, such as imprisonment and/or a fine up to €5 million. Where the offence has resulted in substantial financial gain, the fine may be increased to four times the amount of the offence.

6. The Netherlands

On April 21, 2020, the Dutch Senate adopted an Act implemented amendments to the Fourth Anti-Money Laundering Directive (Directive EU 2015/849). This Act—which entered into force on May 18, 2020—provides that professional and commercial cryptocurrency exchange and wallet providers seeking to provide services in the Netherlands must register themselves at the Dutch Central Bank. For successful registration, adequate internal measures and controls to ensure compliance with EU and national (Dutch) sanctions must be demonstrated. Failure to show adequate sanctions compliance systems could lead to registration being denied, in which case such crypto companies would need to refrain from providing services. Further, the adoption in December 2019 by the Dutch Ministry of Foreign Affairs of guidelines for companies compiling an internal compliance programme (ICP) for “strategic goods, torture goods, technology and sanctions” is noteworthy. These guidelines resemble that of the EU’s guidance aside from the inclusion of shipment control (rather than physical and information security) in its seven core elements.

7. Slovenia

On November 30, 2020, the Slovenian government issued a statement proscribing Hezbollah as a terrorist organisation, becoming the sixth EU member, after the Netherlands, Germany, Lithuania, Estonia, and Latvia to recognize the Iranian-sponsored Hezbollah as a terrorist organization.

8. Spain

On June 12, 2020, the Spanish Ministry of Economic Affairs and Digital Transformation published a Draft Law, amending Law 10/2010 of April 28 on the prevention of money laundering and terrorist financing, to transpose into Spanish domestic law the EU’s Fifth Money Laundering Directive. The legislation also sets out the legal framework for enforcing compliance with EU and UN sanctions. More specifically, when it comes to the enforcement of sanctions, the Draft Law increases the limitation periods for sanctions: in the case of very serious offenses from three to four years, and in the case of serious offenses, from two to three years. In addition, fines will always be accompanied by other sanctions such as public or private reprimands/warnings, temporary suspensions or removals from office, while with the current Law 10/2010 this only occurs in case of sanctions for grave infractions.

C. EU Counter-Sanctions

The EU and its member states are also deeply concerned about the extraterritorial effects of both U.S. and Chinese sanctions and the recent approval of U.S. sanctions in relation to the Nord Stream 2 pipeline have further focused attention on this issue. With respect to Nord Stream 2, Josep Borrell affirmed that the EU does not recognize the extraterritorial application of U.S. sanctions and that it considers such conduct to be contrary to international law.

As discussed above, Germany has taken concrete steps to fend off the threat of U.S. sanctions targeting the Nord Stream 2 pipeline. The German state of Mecklenburg-Vorpommern approved the establishment of the Mecklenburg-Vorpommern Climate and Environmental Protection Foundation (the “Foundation”) to, inter alia, ensure the completion of the Pipeline, which is already more than 94% completed. While the declared aim of the Foundation is to counter climate change and to protect the environment (e.g., to avoid a pipeline run on the bottom of the ocean), the Foundation is also outspokenly designed to provide protection against U.S. sanctions by acquiring, holding and releasing necessary hardware to complete the Pipeline.

If successful, the move to shield companies or projects with state-owned/state-supported foundations might be copied by other governments in the EU, replacing or at least complimenting reliance on the EU Blocking Statute, which, at least in its current form, has been perceived as being insufficient to achieve its stated goal.

The EU has also been taking steps to provide itself with a toolkit that would allow to adopted block or counter non-EU sanctions with which it disagrees. A recent study requested by the European Parliament foreshadows possible upcoming counter sanctions and blocking measures aimed at defending the sovereignty of the European Union. The study suggests, for example, that EU businesses should be encouraged and assisted in bringing claims in international investor-state arbitration and in U.S. courts against sanctions imposed by the U.S. or other States and the blocking of financial transactions by the SWIFT system, which is constituted under Belgian law, subjected to European legislation and has been used in connection with the EU implementation of UN sanctions in the past. It remains to be seen if the EU will take onboard any of the suggestions put forward by the study.

Finally, on January 19, 2021, the EU Commission published a Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions titled “The European economic and financial system: fostering openness, strength and resilience” (the “Communication”). The Communication notes that the EU plans to enforce the policy goals of the EU Blocking Statute through the general investment screening processes, which is enforced by the EU member states. Accordingly, U.S. investments in EU companies could be subject to more intense investment scrutiny if such investments could result in the EU target having to comply with U.S. extra-territorial sanctions.

According to the Communication, the EU Commission also plans to strengthen cooperation on sanctions, in particular with the G-7 partners. Also, the EU Commission will put in place measures to strengthen the Blocking Statute as the EU’s most powerful tool to respond to sanction regimes of third countries, including (i) clearer procedures and rules; (ii) strengthened measures to block the recognition and enforcement of foreign decisions and judgments; (iii) streamlines processing for authorization requests; and (iv) possible involvement in foreign proceedings to support EU companies and individuals.

V. United Kingdom Sanctions and Export Controls

A. Sanctions Developments

1. New U.K. Sanctions Regime

Following the end of the Brexit Transition period on December 31, 2020, EU sanctions regulations are no longer being enforced by the U.K. However, the EU sanctions regime has been substantially retained in law in the U.K. through the introduction of multiple new U.K. sanctions regulations under the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”). The full list of these sanctions regulations can be found here. Certain of the new regulations relate to specific geographic regions (essentially those also subject to EU sanctions regimes). There are also a number of sanctions and related regulations imposing thematic sanctions (again, largely reflecting existing EU regimes), such as those relating to chemical weapons, terrorism, cybersecurity, human rights and kleptocracy.

The U.K. is also now maintaining the U.K. sanctions list, which provides details of all persons designated or ships specified under regulations made under SAMLA, the relevant sanctions measures which apply, and for U.K. designations, reasons for the designation. The U.K. sanctions list is updated in light of decisions making, varying or revoking a designation or specification. The U.K.’s Office of Financial Sanctions Implementation (“OFSI”) maintains a consolidated list of persons and organizations under financial sanctions, including those under SAMLA and other U.K. laws. It should be noted that not all persons designated under EU sanctions regimes have been designated under the new U.K. regulations.

The new U.K. regime differs in certain modest, albeit significant ways, from the EU regime as implemented in the U.K. that went before. Perhaps the most significant of these is the fact that the U.K. sanctions regulations provide a greater degree of clarity than has been present to date in EU instruments as to the circumstances in which a designated person may “own or control” a corporate entity. The relevant provisions typically provide that a person will own or control a company where (s)he holds, directly or indirectly, more than 50 percent of its shares or voting rights or a right to remove or appoint the majority of the board, or where it is reasonable in all the circumstances to expect that (s)he would be able to “achieve the result that affairs of” the company are conducted in accordance with his/her wishes, by whatever means.

The geographic scope of liability under U.K. sanctions regimes is clarified by section 21(1) of SAMLA, and generally extends only to conduct in the U.K. or by U.K. persons elsewhere. Certain U.K. sanctions regulations contain provisions allowing the effect of the sanctions regulation in question to be overridden in the interests of national security or prevention or detection of crime; a provision which has no analogue in the EU sanctions instruments. “No claims” clauses of the kind typically present in EU sanctions regulations (i.e., provisions prohibiting satisfaction of a claim occasioned by the imposition of a sanctions regime) are not a feature of U.K. sanctions regulations.

The provisions in the U.K. sanctions regulations relating to asset-freezes also differ in certain limited, but material respects. For example, the provisions creating offences for breaches of asset-freezes require a prosecuting authority must prove that the accused had knowledge or reasonable cause for suspicion that (s)he was dealing in frozen funds or economic resources.

The framework for U.K. sanctions designations, administrative ministerial and periodic review of designations, and judicial challenges to designation decisions under Chapters 2 and 4 of SAMLA is now in effect.

2. New U.K. Human Rights Sanctions Regime

On July 9, 2020, the U.K. Government introduced into law in the U.K. the Global Human Rights Sanctions Regulations 2020 and began designating individuals under those regulations in connection with their alleged involvement in gross human rights violations. A link to our client alert on these Magnitsky-style sanctions can be found here.

3. The “U.K. Blocking Statute”

Following the end of the Brexit transition period, the EU Blocking Statute (Council Regulation No 2271/96) and related Commission Implementing Regulation 2018/1101) will no longer be directly applicable in the U.K., but will form part of the retained EU law applying in the U.K. through the Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020, which amends the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, the law which implemented the EU Blocking Statute. The explanatory memorandum to the 2020 Regulations can be found here, and related (albeit likely non-binding) summary guidance here.

It therefore remains an offence in the U.K. to comply with a prohibition or requirement imposed by the proscribed U.S. laws relating to Iran and Cuba, or by a decision or judgment based on or resulting from the legislation imposing the proscribed sanctions, and such decisions and judgments may not be executed in the U.K. The offence can be committed by anyone resident in the U.K., a legal person incorporated in the U.K., any legal person providing maritime transport services which is a U.K. national or (where for U.K.-registered vessels) controlled by a U.K. national, or by any other natural person physically present within the U.K. acting in a professional capacity.

4. U.K. Sanctions Enforcement in 2020

On February 18, 2020, OFSI published the fact that two fines totaling £20.47 million had been issued to Standard Chartered for violations of the Ukraine (European Union Financial Sanctions) (No. 3) Regulations 2014, which implemented EU Council Regulation 833/2014 imposing sanctions in view of Russia’s actions in Ukraine. Article 5(3) of the EU Regulation prohibits any EU person from making loans or credit or being part of an arrangement to make loans or credit, available to sanctioned entities, where those loans or credit have a maturity of over 30 days. This enforcement action, which was in connection with loans made by Standard Chartered to Turkey’s Denizbank, which was at the time owned almost to 100% Russia’s Sberbank (then subject to restrictive measures), was OFSI’s highest fine to date. The Report of Penalty can be found here.

The decision followed a review by the Economic Secretary to the Treasury under section 147 of the Policing and Crime Act 2017, which permits a party on whom a monetary penalty is imposed by the Treasury (of which OFSI forms part) under section 146 of that Act to request a review by the relevant minister. The Economic Secretary upheld OFSI’s decision to impose two monetary penalties, but substituted smaller fine amounts. The fines originally imposed by OFSI were of £11.9 million and £19.6 million. The Economic Secretary reduced these to £7.6 million and £12.7 million. These numbers included a 30 percent reduction in accordance with OFSI’s Guidance on Monetary Penalties to reflect the fact that Standard Chartered made a voluntary disclosure in this case. OFSI determined that this case should be considered in the ‘most serious’ category for fining purposes, allowing a maximum reduction of 30 percent.

The fine reductions granted by the Economic Secretary were on the basis of further findings that the bank did not willfully breach the sanctions regime, had acted in good faith, had intended to comply with the relevant restrictions, had fully co-operated with OFSI and had taken remedial steps following the breach. While these factors had been considered in OFSI’s assessment, the Economic Secretary felt they should have been given more weight in the penalty recommendation.

B. Export Controls Developments

Following the end of the Brexit transition period, the domestic regime for exporting controlled goods (primarily military and dual-use items, and goods subject to trade sanctions) remains substantially unchanged in the U.K., save that the U.K.’s relationship with the EU and the equivalent EU regime will change. The Export Control Joint Unit (“ECJU”) remains the body responsible for control and licensing exports of such items. Under the Northern Ireland Protocol to the EU-U.K. Trade and Cooperation Agreement of December 30, 2020, EU regulations governing on export of controlled goods continue to apply in Northern Ireland.

Controls on the export of military items from the U.K. are largely unchanged; such exports remain subject to licensing, although open individual export licenses (“OIELs”) exist for the export of military items from Great Britain (i.e., the U.K. excluding Northern Ireland) to the EU.

The former EU regime for export control of dual use items established under EU Regulation No 428/2009 is largely retained in English law through The Trade etc. in Dual-Use Items and Firearms etc. (Amendment) (EU Exit) Regulations 2019, the Export Control (Amendment) (EU Exit) Regulations 2020 and the Export Control Act 2002, which remains in force.

U.K. persons will now need an export license issued by the U.K. for exports of dual-use items from Great Britain to the EU, however, such exports are covered by a new open general export licence (“OGEL”) published by the ECJU, which reduces the burdens for Great Britain exporters in having to apply for individual licenses. For exports of such items from the EU to the U.K., a license issued by an EU member state will now be needed, although it has been proposed by the European Council that the U.K. be added as a permitted destination under GEA EU001 to avoid licensing burdens for such exports.

An OGEL or individual export license to export dual-use items to a non-EU country issued by the U.K. remains valid for export from Great Britain. Registrations made with the U.K. for the EU General Export Authorisations (“GEAs”) will continue to be valid for exports from Great Britain, as they will automatically become registrations for the retained GEAs. However, an export license issued by an EU member state will no longer be valid for export from Great Britain. Moreover, licenses issued by the U.K. will no longer be valid for export from an EU member state.

* * *

Finally, our entire team wishes you and yours health and safety during what continue to be very challenging circumstances. We recognize that the coronavirus pandemic has affected our clients and friends in different ways over the course of the last year—some have thrived, some are starting to rebuild, and others can never regain what has been lost. Our hearts go out to those who have struggled the most. We aim to be of service in the best and worst of times, and we certainly all hope for better days ahead in 2021.

_________________________

[1] Judgment of the Court of Justice of the European Union of December 19, 2018 in case C‑530/17 P, Mykola Yanovych Azarov v The Council of the European Union, para. 26, EU:C:2018:1031.

[2] Judgment of the General Court of the European Union of July 11, 2019 in cases T‑244/16 and T‑285/17, Viktor Fedorovych Yanukovych v The Council of the European Union, EU:T:2019:502; Judgment of the General Court of the European Union of July 11, 2019 in case T‑274/18, Oleksandr Viktorovych Klymenko v The Council of the European Union, EU:T:2019:509; Judgment of the General Court of the European Union of July 11, 2019 in case T‑285/18, Viktor Pavlovych Pshonka v The Council of the European Union, EU:T:2019:512.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Attila Borsos, Patrick Doris, Markus Nauheim, Adam M. Smith, Michael Walther, Wilhelm Reinhardt, Qi Yue, Stephanie Connor, Chris Timura, Matt Butler, Laura Cole, Francisca Couto, Vasiliki Dolka, Amanda George, Anna Helmer, Sebastian Lenze, Allison Lewis, Shannon C. McDermott, Jesse Melman, R.L. Pratt, Patrick Reischl, Tory Roberts, Richard Roeder, Sonja Ruttmann, Anna Searcey, Samantha Sewall, Audi Syarief, Scott Toussaint, Xuechun Wen, Brian Williamson, Claire Yi, Stefanie Zirkel, and Shuo Josh Zhang.

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Jesse Melman – New York (+1 212-351-2683, jmelman@gibsondunn.com)
R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Europe:
Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0)20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com)
Matt Aleksic – London (+44 (0)20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On January 9, 2021, the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”) issued the MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “Chinese Blocking Statute”). The Chinese Blocking Statute establishes the first sanctions blocking regime in China to counteract the impact of foreign sanctions on Chinese persons.[1] While the law is effective immediately, as noted below, it currently only establishes a legal framework. The law will become enforceable once the Chinese government denotes the specific extraterritorial measures—likely sanctions and export controls the United States is increasingly levying against Chinese companies—to which it then will apply.

The European Union has a comparable set of rules – known as the “EU Blocking Statute” – which seeks to restrict the impact on EU parties of unilateral, extraterritorial U.S. sanctions.[2] The new Chinese rules appear to borrow much from the European model.

There are several core components to the new Chinese rule:

Reporting Obligation: The Chinese Blocking Statute creates a reporting obligation for Chinese persons and entities impacted by extraterritorial foreign regulations. Under the new rules, when “a [Chinese] citizen, legal person or other organization … 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,” the Chinese person or entity is required to report such matters to China’s State Council within 30 days.[3] Critically, this reporting obligation is applicable to Chinese subsidiaries of multinational companies.

A comparable reporting requirement, including the 30-day reporting obligation, is also found in the EU Blocking Statute.[4]

Implicated Foreign Laws: Unlike the EU Blocking Statute, the specific laws and measures covered by the Chinese Blocking Statute have yet to be identified. Specifically, the Chinese Blocking Statute establishes a mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue prohibitions against compliance with these foreign laws. Under the Chinese Blocking Statute, a “working mechanism” led by the State Council is responsible for assessing and determining whether the foreign sanctions laws constitute “unjustified extra-territorial application of foreign legislation and other measures.” The law sets out an open-ended and largely undefined list of factors for the State Council to consider, including whether the law represent “a violation of principals of international relations,” impacts China’s “national sovereignty, security and development interests,” or effects the “legitimate rights and interests” of Chinese persons and entities, as well as “other factors that shall be taken into account.”[5] If the working mechanism confirms the existence of an “unjustified extraterritorial application” of a foreign law, it will direct the State Council to issue an order prohibiting parties in China from complying with the law.[6]

The EU Blocking Statute, in comparison, applies only to a specific set of laws specified in its Annex[7]–which presently consists principally of certain U.S. sanctions on Cuba and Iran. While the Chinese model may appear to provide individuals and entities with time to adjust and comply as the Chinese government will only list laws and measures in the future, the Chinese rules might eventually target substantially more foreign laws and measures.

Exemption Process: A Chinese person or entity will be able to apply for an exemption from compliance with the prohibition by submitting a written application to the State Council. Such request will need to provide the reasons for and the scope of the requested exemption. The State Council will then decide whether to approve such application within 30 days or less.[8] The format for applying for an exemption is not yet clear.

The EU Blocking Statute has a similar exemption mechanism. However, the EU Blocking Statute provides for approval “(…) without delay”[9]—which in practice can mean significantly more than 30 days.

Private Right of Action: Like the EU Blocking Statute, the Chinese rule creates a private right of action for Chinese persons or entities to seek civil remedies in Chinese courts from anyone who complies with prohibited extraterritorial measures, unless the State Council has granted an exemption to the prohibition order.[10] Under the EU Blocking Statute, EU entities are also entitled to sue for damages, including legal costs, arising from the application of the extraterritorial measures (enforcement of which claims may extend to seizure and sale of assets).[11]

A Chinese person or entity who suffers “significant losses” due to a counterparty’s compliance with a prohibited law may also obtain “necessary support” from the Chinese government[12].

Consequences of Non-Compliance: A Chinese person or entity who fails to comply with the reporting obligation or the prohibition order may be subject to government warnings, orders to rectify, or fines.[13] Under the EU Blocking Statute, individual member states exercise enforcement authority. In several such states, entities have been threatened with fines, and have even been subject to mandated specific performance of contractual obligations which may expose them to risk of liability under U.S. sanctions.

While the Chinese regulations remain nascent and the initial list of extra-territorial measures that the Blocking Statute will cover has yet to be published, the law marks a material escalation in the longstanding Chinese rhetoric threatening counter-measures against the United States (principally) by establishing a meaningful Chinese legal regime that will challenge foreign companies with operations in China. If the European model for the Blocking Statute continues to be Beijing’s inspiration, we will likely see both administrative actions to enforce the measures as well as private sector suits to compel companies to comply with contractual agreements, even if doing so is in violation of their own domestic laws.

U.S. authorities recognize the challenge posed by the EU Blocking Statute, and the recent increasingly robust public and private sector enforcement of it. However, the U.S. Government has not formally adjusted U.S. sanctions programs to account for the legal conflict faced by U.S. and European companies eager to remain on the right side of both U.S. and European regulations. The question for the United States with respect to this new Chinese law will be how to balance the progressively aggressive suite of U.S. sanctions and export control measures levied against China—which the U.S. Government is unlikely to pare back—against the growing regulatory risk for global firms in China that could be caught between inconsistent compliance obligations.

As has long been the case, international companies will continue to be on the front lines of Beijing-Washington tensions and they will need to remain flexible in order to respond to a fluid regulatory environment and maintain access to the world’s two largest economies.

______________________

[1] MOFCOM Order No.1 of 2021 on Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (January 9, 2021) (“Chinese Blocking Statute”), http://www.mofcom.gov.cn/article/b/c/202101/20210103029710.shtml (Chinese), http://english.mofcom.gov.cn/article/policyrelease/questions/202101/20210103029708.shtml (English)

[2] https://www.gibsondunn.com/new-iran-e-o-and-new-eu-blocking-statute-navigating-the-divide-for-international-business/

[3] Chinese Blocking Statute (Article 5)

[4] Article 2 of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.

[5] Chinese Blocking Statute (Articles 4 & 6)

[6] Id. (Article 7)

[7] Id. (Article 5); Annex of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom. Under Article 11a, the European Commission has power to adopt legislation adding further foreign extraterritorial laws to the Annex to the EU Blocking Statute.

[8] Chinese Blocking Statute (Article 8)

[9] Article 5 of Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council 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.

[10] Chinese Blocking Statute (Article 9)

[11] Article 6 of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.

[12] Chinese Blocking Statute (Article 11)

[13] Chinese Blocking Statute (Article 13)

The following Gibson Dunn lawyers assisted in preparing this client update: Kelly Austin, Judith Alison Lee, Adam M. Smith, Patrick Doris, Ronald Kirk, Ning Ning, Chris Timura, Stephanie Connor, and Richard Roeder.

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Jesse Melman – New York (+1 212-351-2683, jmelman@gibsondunn.com)
R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia and Europe:
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)
Joerg Bartz – Singapore – (+65 6507 3635, jbartz@gibsondunn.com)
Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0)20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com)
Matt Aleksic – London (+44 (0)20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On November 12, 2020, President Trump issued Executive Order (“E.O.”) 13959 restricting the ability of U.S. persons to invest in securities of certain “Communist Chinese military companies.”[1] This E.O. alleges that under China’s national strategy of “Military-Civil Fusion,” China “exploits United States investors” to finance the development of its military, intelligence, and security capabilities. While the E.O. is only the latest in a flurry of actions by the Trump administration directed against Beijing, it is the first measure to focus on securities—including investments in securities of dozens of prominent Chinese companies, as well as mutual funds and index funds that hold such companies’ shares. Under the E.O., U.S. persons—including individual and institutional investors, stock exchanges, fund managers, investment advisers, broker-dealers, and insurance companies—will be prohibited from purchasing for value publicly traded securities of certain Chinese companies starting in early January 2021 and, absent a change in policy by the incoming Biden administration, will be incentivized to engage in divestment transactions through November 11, 2021.

The E.O. currently applies to 31 ostensibly civil companies that the United States alleges have ties to the Chinese military. The names of those companies appear on two lists published by the U.S. Department of Defense in June 2020 and August 2020, and reproduced below. The U.S. Department of the Treasury has yet to publish guidance indicating whether the E.O. extends to those companies’ subsidiaries; however, a plain-language reading of the E.O. suggests that it may only apply to subsidiaries (if any) that the U.S. Secretary of the Treasury identifies by name. Among the targeted entities are substantial enterprises such as China Mobile Communications and Hikvision, many of which have shares traded on mainland Chinese, Hong Kong, or U.S. stock exchanges. Additionally, several of the targeted companies were added earlier this year to the U.S. Department of Commerce’s Entity List and are therefore already subject to stringent restrictions on access to U.S.-origin goods, software, and technologies. In that sense, the new E.O. marks an expansion of U.S. pressure on Beijing from targeting suppliers of certain large Chinese firms to constricting their sources of financing, albeit in a relatively narrow manner. According to a leading China-focused research organization, of the 31 companies identified to date, only 13 are publicly traded components of the MSCI China Index and only Hikvision has substantial foreign ownership.[2]

Effective January 11, 2021—sixty days after the E.O. was issued—U.S. persons are prohibited from engaging in “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company.” “Transaction” is defined to mean the purchase for value of any publicly traded security and the prohibition applies to shares in such companies, as well as shares held indirectly through popular investment vehicles such as exchange traded funds. The E.O. also permits U.S. persons, until November 11, 2021—one year after the E.O. was issued—to engage in otherwise prohibited transactions in order to divest their existing holdings in any of the named Communist Chinese military companies. Although the E.O.’s narrow definition of prohibited transactions does not appear to require U.S. persons to divest holdings in these companies, the prospect of securities becoming illiquid after November 11, 2021 may lead many U.S. investors to divest their holdings during this time.

In this regard the surgical and staggered imposition of restrictions under the E.O. reflects prior approaches the United States used with Venezuela and Russia and is likely animated by similar concerns. When the United States acted to limit the Maduro regime’s access to finance starting in 2017, it, inter alia, restricted transactions associated with certain Venezuela bonds. But, in order to limit the collateral consequences on innocent parties that held significant numbers of those bonds, the United States allowed the limited divestment of those bonds. In the Russia context, following the Crimea incursion in 2014, the United States imposed sanctions on some of the largest enterprises in the Russian financial and energy sectors. However, due to the exposure of U.S. and allied interests to those enterprises, the United States similarly stopped short of imposing blocking sanctions on any of the targeted entities. As with the new China E.O., Russian “sectoral” sanctions prohibit U.S. persons from engaging in only certain types of financial transactions with identified firms. And, importantly, absent some other prohibition, the earlier Russian sectoral sanctions and the new China E.O. permit U.S. persons to continue engaging in all other lawful dealings with listed entities.

The new E.O. is the latest in a series of U.S. measures calculated to address perceived threats to U.S. national security posed by China’s policy of “Military-Civil Fusion.”[3] Like the U.S. Department of Commerce’s expansion of the Military End User Rule, the new Huawei-specific Direct Product Rule, and the recent spate of Entity List designations, as well as the U.S. Government’s procurement ban on certain technologies from several Chinese companies (including two companies that are subject to the new E.O.), this latest action is designed to curtail American support for Chinese companies that allegedly support the Chinese military. The E.O. also complements outreach by the U.S. State Department in August 2020 urging colleges and universities to divest from Chinese holdings more generally,[4] and President Trump’s Working Group on Financial Markets, which has developed guidance that would require companies to provide American regulators with access to audit work papers to remain listed on U.S. exchanges, access that China had historically refused.[5] White House officials are reportedly prioritizing further action against Beijing during President Trump’s final weeks in office.

While the E.O.’s prohibition will take effect shortly before President-elect Biden is sworn in, the apparent wind-down period for U.S. persons to divest their holdings in the listed Communist Chinese military companies extends nearly a year into the next president’s term. As such, in our assessment, the key date for this new policy is not only January 11, 2021, when the prohibition takes effect, but also nine days later when the new administration assumes power. Because the E.O. is not mandated by statute or any other requirement, once in office President Biden could engage with the E.O. as he sees fit: he could revoke the E.O. outright, narrow its reach through published guidance and the exercise of enforcement discretion, decline to target additional Chinese companies, or allow the E.O. to lapse on November 12, 2021 when the President is required by the International Emergency Economic Powers Act to renew the national emergency determination that allowed for the E.O.

However, even for a Biden administration that will be intent on changing the tone of U.S. foreign policy—including through closer coordination with traditional allies—rescinding or eliminating these and other restrictions on Beijing without receiving any concessions in return could spark bipartisan pushback in the U.S. Congress and potentially in the electorate. Moreover, even if President Biden were to narrow or revoke the new E.O., the measure may nevertheless serve its intended purpose of making U.S. persons (including U.S. financial institutions) less willing to hold securities or other financial instruments of, or do other business with, companies that have been linked to the Chinese military, intelligence, or security services. Furthermore, in light of China’s increasingly robust regulatory responses to U.S. unilateral measures—seen in the Hong Kong national security law, Beijing’s new export control law, and its continued threat of establishing an “unreliable” suppliers list for companies that choose to comply with U.S. regulations and cease certain sales to Chinese companies—we expect that China will also respond to this E.O. How China chooses to react will either reduce tensions between Beijing and Washington or continue to exacerbate the situation by potentially imposing costs on entities that choose to comply with this new measure.

* * *

As of November 12, 2020, the 31 Communist Chinese military companies to which the prohibition will apply are as follows:

Aviation Industry Corporation of China (AVIC)
China Aerospace Science and Technology Corporation (CASC)
China Aerospace Science and Industry Corporation (CASIC)
China Electronics Technology Group Corporation (CETC)
China South Industries Group Corporation (CSGC)
China Shipbuilding Industry Corporation (CSIC)
China State Shipbuilding Corporation (CSSC)
China North Industries Group Corporation (Norinco Group)
Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
Huawei
Inspur Group
Aero Engine Corporation of China
China Railway Construction Corporation (CRCC)
CRRC Corp.
Panda Electronics Group
Dawning Information Industry Co (Sugon)
China Mobile Communications Group
China General Nuclear Power Corp.
China National Nuclear Corp.
China Telecommunications Corp.
China Communications Construction Company (CCCC)
China Academy of Launch Vehicle Technology (CALT)
China Spacesat
China United Network Communications Group Co Ltd
China Electronics Corporation (CEC)
China National Chemical Engineering Group Co., Ltd. (CNCEC)
China National Chemical Corporation (ChemChina)
Sinochem Group Co Ltd
China State Construction Group Co., Ltd.
China Three Gorges Corporation Limited
China Nuclear Engineering & Construction Corporation (CNECC)

_____________________

[1] Exec. Order No. 13959, 85 Fed. Reg. 73185 (Nov. 12, 2020), https://www.govinfo.gov/content/pkg/FR-2020-11-17/pdf/2020-25459.pdf.

[2] Another Trump Attack on Chinese Stocks, Gavekal Dragonomics (Nov. 13, 2020), https://research.gavekal.com/article/another-trump-attack-chinese-stocks.

[3] The Military-Civil Fusion policy is described in China’s national strategic plan “Made in China 2025,” which was announced by Premier Li Keqiang and his cabinet in May 2015.

[4] Kevin Cirilli & Shelly Banjo, U.S. Warns Colleges to Divest China Stocks on Delisting Risk, Bloomberg Quint (Aug. 19, 2020), https://www.bloombergquint.com/business/state-department-urges-colleges-to-divest-from-chinese-companies.

[5] Press Release, President’s Working Group on Financial Markets Releases Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies, U.S. Dep’t of Treasury (Aug. 6, 2020), https://home.treasury.gov/news/press-releases/sm1086.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Jose Fernandez, Chris Timura, Stephanie Connor, R.L. Pratt and Scott Toussaint.

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Jesse Melman – New York (+1 212-351-2683, jmelman@gibsondunn.com)
R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia and Europe:
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)
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Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0)20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com)
Matt Aleksic – London (+44 (0)20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Despite the ongoing global pandemic, sanctions and export controls continue to be a most-favored enforcement tool of the U.S. government. Since the outset of 2020, the government has continued to develop, implement, and enforce new international trade sanctions and export controls across a wide range of industry sectors and regions, including in novel and unprecedented ways. Join Gibson Dunn attorneys as they provide a mid-year update on the recent trends in this constantly evolving space.

Topics to be covered include:

Major U.S. sanctions programs developments, including Iran, Venezuela, Syria, and North Korea
New sanctions programs and developments, including those affecting China/Hong Kong, significant designations, and recent executive orders targeting the International Criminal Court, TikTok, and WeChat
New major developments in export controls, including additions to the Entity List and new restrictions on military end use and end users.

View Slides (PDF)

PANELISTS:

Judith Alison Lee is a partner in the Washington, D.C. office and Co-Chair of the firm’s International Trade Practice Group. Ms. Lee is a Chambers ranked leading International Trade, Export Controls, and Economic Sanctions lawyer practicing in the areas of international trade regulation, including USA Patriot Act compliance, economic sanctions and embargoes, export controls, and national security reviews (“CFIUS”). Ms. Lee also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers.

Jesse Melman has experience representing clients, including major multinational corporations and financial institutions, in connection with their sanctions, anti-corruption, and anti-money laundering compliance programs. His practice includes conducting internal and governmental investigations, evaluating transactions for sanctions and corruption risk, obtaining licenses and authorizations, and designing and assessing programs, policies, and procedures to ensure compliance with sanctions and anti-corruption laws. In addition to his international trade practice, Mr. Melman has extensive experience defending clients in connection with investigations and civil suits involving a wide array of issues, including accounting, tax reporting, securities trading, and other business practices.

R.L. Pratt counsels clients on compliance with U.S. economic sanctions, export controls (ITAR and EAR), foreign investment, and international trade regulatory issues and assists in representing clients before the departments of State (DDTC), Treasury (OFAC and CFIUS), and Commerce (BIS). Before joining Gibson Dunn, he was an associate at a large international law firm where his practice focused on providing counsel on U.S. economic sanctions and export controls and reviews of foreign investment conducted by CFIUS.

Samantha Sewall advises clients across industry sectors on an array of trade compliance matters, including U.S. economic sanctions, export controls, antiboycott, and national security reviews (CFIUS). She has experience advising clients in aerospace, banking and finance, consulting, defense, manufacturing, medical devices, oil and gas, pharmaceuticals, telecommunications, and travel. Prior to joining Gibson Dunn, Ms. Sewall served as a Political-Economic Program Assistant supporting the U.S. Embassy in Côte d’Ivoire. During her time there she was responsible for programs and research related to private sector engagement and bilateral political and economic issues.

Audi Syarief has provided sanctions and export controls advice to major corporations and non-profit organizations. He has extensive experience in assessing enforcement and designation risk, conducting internal investigations, strengthening trade compliance programs, and securing licenses and other authorizations from OFAC. He is particularly well-versed in the application of technology- and information-based sanctions authorizations, such as the Berman Amendment and General License D-1. He has also litigated Helms-Burton Act cases, and advised numerous clients on potential recovery and/or risks under the statute. In addition to his trade practice, Audi has represented clients in civil and criminal matters spanning a variety of subject areas, including government contracts, securities fraud, and the False Claims Act. Most recently, he helped secure the termination of an SEC investigation of a global financial institution relating to alleged accounting fraud.

Scott Toussaint advises clients on matters before the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Committee on Foreign Investment in the United States (CFIUS), and other regulatory and enforcement agencies. He has extensive experience counseling U.S. and foreign companies on compliance with OFAC sanctions, obtaining licenses and authorizations, developing corporate compliance programs, and assessing the national security implications of proposed mergers and acquisitions. He represents clients across a wide range of industries, including energy, banking and financial services, private equity, shipping, manufacturing, and consumer products.

Under the Trump Administration, an unprecedented number of Chinese companies have been designated to the U.S. Commerce Department Entity List. Learn about the reasons for these designations, what the effect is on these companies, their suppliers and customers, and what you can do to mitigate the disruptive effects.

“A Deep-Dive Analysis”

What is new about the Trump Administration’s treatment of Chinese companies under the Entity List?
What are the reasons given by the Trump Administration for putting Chinese companies on the Entity List?
What can a company do to avoid designation?
Once a designation is made, what should suppliers and customers do?
How can a company get off the list?

Hear from our lawyers in Washington, D.C. and Beijing on these developments and what we can expect in the future. The discussion will be held in both English and Mandarin Chinese.

View Slides (PDF)

PANELISTS:

Judith Alison Lee is a partner in the Washington, D.C. office and Co-Chair of the firm’s International Trade Practice Group. Ms. Lee is a Chambers ranked leading International Trade, Export Controls, and Economic Sanctions lawyer practicing in the areas of international trade regulation, including USA Patriot Act compliance, economic sanctions and embargoes, export controls, and national security reviews (“CFIUS”). Ms. Lee also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers.

Fang Xue is a partner and Chief Representative of the Beijing office. Ms. Xue is a Chambers ranked leading lawyer in Asia-Pacific for China-based Corporate M&A work. She has represented Chinese and international corporations and private equity funds in cross-border acquisitions, private equity transactions, stock and asset transactions, joint ventures, going private transactions, tender offers and venture capital transactions, including many landmark deals among those.

R.L. Pratt is an associate in the Washington, D.C. office and a member of the firm’s International Trade Practice Group. Mr. Pratt counsels clients on compliance with U.S. economic sanctions, export controls (ITAR and EAR), foreign investment, and international trade regulatory issues and assists in representing clients before the departments of State (DDTC), Treasury (OFAC and CFIUS), and Commerce (BIS).

Shuo Josh Zhang is an associate in the Washington, D.C. office and a member of the Litigation, International Trade, and White Collar Defense and Investigations Practice Groups. Mr. Zhang has experience representing tech clients across various industries in FCPA defense and investigations, export control compliance matters, CFIUS due diligence and compliance matters, and international arbitration.

Christopher Timura is of counsel in the Washington D.C. office, is a member of the firm’s International Trade Practice Group. He counsels clients on export controls (ITAR and EAR), and economic sanctions, and represents them before the departments of State (DDTC), Treasury (OFAC and CFIUS), Commerce (BIS), Homeland Security (CBP), and Justice in investment reviews, licensing, and in voluntary and directed disclosures involving both civil and criminal enforcement actions.

The Hong Kong Court of Appeal (Court of Appeal) recently reaffirmed[1], in the context of an application for an examination order of individuals (Respondents) residing in Hong Kong to obtain information which may enable partial satisfaction of a judgment debt under a judgment in proceedings in a foreign court to which neither the Respondents nor the companies of which they are officers were parties, that pre-trial discovery against non-party witness is not permitted, save within the limited scope of Norwich Pharmacal discovery.

1. Background Leading to the Application in Hong Kong

The applicants for the Hong Kong examination order (Applicants) obtained a judgment for US$100,738,980 (Judgment Debt) in the United States District Court, Western District of Washington at Seattle (Federal Court) against a number of judgment debtors.

The Applicants’ case was that based on the unaudited balance sheet of one of the judgment debtors (Judgment Debtor), there were receivables owed by some third parties to the Judgment Debtor, being US$18.9 million by an exempted limited partnership registered in Cayman Islands, and US$4 million by a company incorporated in the British Virgin Islands (respectively, the Two Sums and the Third Parties).

The Applicants were appointed by the King County Superior Court, State of Washington (State Court) as collecting agent to collect the receivables of the Judgment Debtor, including the Two Sums. Such receivables were to be applied to satisfy the Judgment Debt. The State Court subsequently clarified that it did not have jurisdiction over the Third Parties (as they had no place of business in the State of Washington) and it did not adjudicate on the issue of whether the Two Sums were owed by them to the Judgment Debtor, and held that the collection orders only placed the Applicants in the shoes of the Judgment Debtor for collection purposes and such orders could be made even though the State Court had no jurisdiction over the Third Parties.

Of importance to note is that the collection orders were not garnishee orders, and there is no evidence to suggest that the Federal Court and the State Court had the requisite personal jurisdiction over the Third Parties for garnishee proceedings. Further, the relevant transaction agreements between the Judgment Debtor and the Third Parties respectively had an exclusive jurisdiction clause, which provided that the agreements were governed by the laws in Hong Kong and subject to resolution solely in the Hong Kong Courts.

The Two Sums were disputed by the Third Parties, and their case was that it was the Judgment Debtor which owed them monies instead.

The Respondents, being the subjects of the examination order, are officers of the Third Parties, who reside in Hong Kong.

2. Procedural History in the Hong Kong Courts

The Federal Court issued two Letters of Request for an examination of the Respondents, the purpose of which was to allow the Applicants to obtain information regarding the Two Sums that may enable them to collect the monies owed to the Judgment Debtor which could be utilised to satisfy the Judgment Debt.

An ex parte application by way of an Originating Summons supported by the two Letters of Request to examine the Respondents were made by the Applicants and Master Lai of the Court of First Instance (CFI) granted an examination order (Examination Order).

The Respondents applied to set aside the Examination Order and/or to strike out the Applicants’ ex parte Originating Summons. Both applications were allowed by Recorder Yvonne Cheng SC (Judge) of the CFI.

The Applicants appealed against the decision of the Judge, which decision was upheld by the Court of Appeal.

3. Requirements under the Evidence Ordinance (Cap. 8) (Ordinance) in the Context of Evidence for Civil Proceedings in Other Jurisdictions

Whilst both sections 75(b) and 76(3) of the Ordinance are relevant in the circumstances[2], the Court of Appeal upheld the Judge’s decision based on section 76(3) alone. The analysis under paragraph 3.2 below on section 75(b) is included for completeness.

3.1 Section 76(3) – Pre-Trial Discovery Against Non-Party Witness Prohibited

Section 76 provides for the power of the Court of First Instance to give effect to an application for assistance in obtaining evidence for civil proceedings in foreign courts. Section 76(3) states that:

An order under this section shall not require any particular steps to be taken unless they are steps which can be required to be taken by way of obtaining evidence for the purposes of civil proceedings in the court making the order (whether or not proceedings of the same description as those to which the application for the order relates)…” (emphasis added)

The Judge held that the proposed examination was for pre-trial discovery against non-party witnesses, which is not permitted under Hong Kong law and prohibited by section 76(3), since the allegations of fact relied upon by the Applicants (in short, the Third Parties owed monies to the Judgment Debtor) were not live issues before and to be resolved by the Federal Court where the main action was concluded, and enforcement proceedings (i.e. garnishee proceedings) in which such allegations could be raised had not been instituted. As to the Applicants’ alternative case that after the examination of the Respondents they would “plot a course for collection depending on the evidence so obtained”, the judge held that the proposed examination was a fishing exercise.

The Court of Appeal agreed with the Judge’s decision, and made, inter alia, the following remarks:

Hong Kong has adopted the common law position that there is no pre-trial discovery against non-party witnesses other than those falling within the limited scope of Norwich Pharmacal discovery (i.e. discovery against third parties who got innocently mixed up in the wrongdoings of others);
whether the assistance request falls foul of section 76(3) on account of fishing must be a matter for the judge in Hong Kong by reference to Hong Kong laws rather than US laws under which the permissible scope of discovery is wider. Whilst examination which is investigatory in nature (in contrast to eliciting admissible evidence) is allowed under US laws, it is not permitted under Hong Kong laws; and
obtaining information from a non-party witness by way of post-judgment discovery in aid of execution, whilst permissible under US laws, is not a permissible procedure in Hong Kong, noting that if a judgment creditor has sufficient ground to support the application for a garnishee order in respect of a debt due to a judgment debtor, the judgment creditor has to commence garnishee proceedings first before he can obtain directions for determination of the liability of the garnishee (including directions for discovery as necessary)[3].

3.2 Section 75(b) – Obtaining Evidence for the Purposes of Civil Proceedings

Section 75 provides for the requirements to be fulfilled in an application for assistance. Section 75(b) provides that:

“Where an application is made to the Court of First Instance for an order for evidence to be obtained in Hong Kong and the court is satisfied that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated, the Court of First Instance shall have the powers conferred on it by this part.” (emphasis added)

The central issue under this section is therefore whether evidence is to be obtained for the purposes of civil proceedings, instituted or contemplated, before the requesting court.

The Judge, without the benefit of expert evidence on US law from the Applicants which was set out in an affirmation[4], ruled that the requirement was not satisfied because the evidence was not obtained for the purposes of civil proceedings which either have been instituted before the Federal Court or whose institution was contemplated.

The Judge rejected that the very application for discovery leading to the Federal Court’s request for evidence could constitute civil proceedings within the meaning of section 75(b) as a matter of construction, since it would render the section redundant. Further, since there was no evidence that the Applicants could establish the Federal Court’s jurisdiction over the Third Parties, it could not be said that proceedings against the Third Parties in the said court for enforcement of the judgment were contemplated.

The Court of Appeal, however, left the issue open, since it disagreed with the Judge on the admissibility of the Applicants’ expert evidence on US law.[5]

Notwithstanding such disagreement and that it was prepared to assume that under US law, the obtaining of information to facilitate the “plotting of the next course of action” would be regarded as obtaining evidence for use in the Federal Court proceedings, the Court of Appeal took the view that it also had to be established that the relevant proceedings were proceedings in a civil or commercial manner in the requested jurisdiction, i.e. Hong Kong court, in addition to the requesting jurisdiction.

In this regard, the Court of Appeal considered that the mere facilitation of the Applicants to act as collection agent did not qualify as civil proceedings in Hong Kong. Whilst discovery procedure is a form of civil proceedings in Hong Kong, such discovery would not be permitted against non-party witnesses, other than the limited form of Norwich Pharmacal discovery.

4. Conclusion

It is clear from the decisions of the Judge and the Court of Appeal that to obtain an order for assistance in obtaining evidence for civil proceedings in a foreign court, such obtaining of evidence must be permissible under the laws of Hong Kong. It is not sufficient that it is only permissible under the laws of the requesting jurisdiction (which may be implied by the Letter of Request issued by the foreign court). On this note, pre-action discovery against non-party witness is not permitted in Hong Kong save for Norwich Pharmacal discovery.

_______________________

[1] Re a civil matter now pending in United States District Court for the Western District of Washington at Seattle under No 2:13-CV-1034 MJP ([2020] HKCA 766). The presiding judges were Hon Lam VP, Chu JA and G Lam J. A copy of the judgement of the Court of Appeal is available here. The judgment of the Court of First Instance ([2019] HKCFI 1738) is available here.

[2] The Respondents also argued that (1) there were material non-disclosures on the Applicants’ part when they took out the ex parte application for the Examination Order and (2) the Examination Order contravened section 6 of the Protection of Trading Interests Ordinance (Cap. 471). However, these were not the focus of the Judge or the Court of Appeal and accordingly, are not the focus of this alert.

[3] The Applicants did not commence garnishee proceedings against the Third Parties since the Federal Court did not appear to have personal jurisdiction over the Third Parties and they were also unable to say that the Two Sums were actually due from these entities to the Judgment Debtor. Further, the Applicants also faced the difficulty of the exclusive choice of forum clauses in the agreements governing the transactions between the Judgment Debtor and the Third Parties. However, these issues were not put before the Federal Court in the application for the Letters of Request and accordingly, the Federal Court had no opportunity to address it. The Court of Appeal remarked that if the Applicants wished to rely on the use of evidence of the Respondents in garnishee proceedings against the Third Parties, they should have at least alluded to such basis in their motion for application for the Letters of Request.

[4] The Judge ruled that such evidence was not admissible on the basis that there was no expert declaration in accordance with Order 38 Rule 37C of the Rules of the High Court (RHC). The expert for the Applicants, being the general counsel of the Applicants (who was heavily engaged in the present dispute), felt that he was unable to give an expert declaration.

[5] The Court of Appeal was inclined to take the view that the prohibition against admissibility for lack of expert declaration under Order 38 Rule 37C of the RHC does not apply automatically to expert evidence set out in affidavits or affirmations adduced under Order 38 Rule 2(3) (as opposed to expert reports filed for trial pursuant to directions given under Order 38 Rule 6 regarding proceedings commenced by, inter alia, Originating Summons), being an exception under Order 38 Rule 36(2) .

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)

Elaine Chen (+852 2214 3821, echen@gibsondunn.com)

Emily Chan (+852 2214 3825, echan@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

1. Introduction

On December 28, 2019, China’s Standing Committee of the National People’s Congress (“NPC”) published the draft Export Control Law of the People’s Republic of China (“2019 Draft”), a revised version of an earlier draft first published by the Chinese Ministry of Commerce (“MOFCOM”) on June 16, 2017 (“2017 Draft”).[1] On July 3, 2020, the NPC published a further revised draft Export Control Law of the People’s Republic of China (“2020 Draft”) (the 2019 Draft and the 2020 Draft collectively the “Draft Laws”). The resultant set of draft legislation is China’s first step towards a comprehensive and unified export control regime.

Against this backdrop, we take this opportunity to (i) summarize the current status quo of China’s export control regime; (ii) discuss in depth the key features of both Draft Laws; and (iii) analyze their potential impact on our clients around the globe.

2. Status Quo of China’s Export Control Regime

2.1 Overview

Currently, China’s export control regime is scattered across multiple laws, administrative regulations, and other guidelines, including but not limited to: (i) the Foreign Trade Law (rev. 2016); (ii) the Customs Law (2017); (iii) the Administrative Regulations on Import and Export of Goods (2001); (iv) the Administrative Regulations on Import and Export of Technologies (2019); (v) the Regulations on Control of Arms Export (2002); (vi) the Regulations on Control of Nuclear Export (2006); (vii) the Administrative Regulations on Monitored Chemicals (2011); (viii) the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007); (ix) the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002); and (x) the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002). Apart from the foregoing, the Criminal Law (as amended) and the Customs Law (2017) as well as the Implementation Regulations on Customs Administrative Penalties (2004) prescribe criminal liability and administrative penalties for violations of Chinese export control regulations.[2]

2.2 Scope

2.2.1 General

Through the various regulations described above, China’s export control laws and regulations cover items ranging from finished goods (such as products and equipment), components, and raw materials, to intellectual property (such as technologies and software). Generally speaking, China’s current export control regime regulates a wide range of activities such as “the export for trade purpose […], gifting, exhibition, scientific and technological cooperation, assistance, services and […] transfers by other means.”[3]

To date, China’s export control regulations have been focused on equipment, technologies, and services relating to sensitive items, including but not limited to missiles, arms, nuclear, certain chemicals, biological dual-use items, and explosives. In addition, MOFCOM, sometimes together with other authorities, has announced interim export control measures from time to time on items not specifically covered by the existing regulations upon approval of the Chinese State Council and other competent authorities. For example, in 2015, MOFCOM, China’s General Administration for Customs (the “China Customs”), the former State Administration for Science, Technology and Industry for National Defense (“SASTIND”), and the People’s Liberation Army General Armaments Department (“PLA Armaments”) jointly announced restrictions on the export of certain military and civil dual-use unmanned aerial vehicles.[4]

2.2.2 Extraterritoriality

Unlike some components of the U.S. export control regime and U.S. secondary sanctions, China’s export control regime currently generally does not purport to extend to re-exports by foreign persons that are not subject to Chinese jurisdiction.

However, as more fully described in Section 2.5 below, the end user and end-use requirements with respect to certain items effectively already have some (limited) extraterritorial effect. In addition, for clarification purposes, transit, transshipment and through shipment of dual-use items and technologies and export of the same via special customs supervision areas or bonded supervision areas are also subject to current Chinese export control law.[5]

2.3 Registration of Exporters

Article 9 of the Foreign Trade Law requires all exporters (whether or not the relevant products are subject to export control measures) to file and register with the “department of the State Council in charge of foreign trade” (currently MOFCOM), or any authorities entrusted by it, unless such filings and registrations are otherwise exempted. Failure to submit the necessary filings or be duly registered will be an impediment to obtaining clearance or relevant declarations from China Customs. This is especially the case for exporters of items subject to export control, and is a requirement that is duplicated in other export control regulations. For example, the Regulations on Control of Missiles and Missile-related Items and Technologies Export require relevant exporters to register with the “department of the State Council in charge of foreign economy and trade” (currently MOFCOM). Likewise, the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export also require relevant exporters to register with MOFCOM.

2.4 Quota Restrictions and Export Licenses

Pursuant to Article 19 of the Foreign Trade Law, quota restrictions and export licenses are the most powerful and widely used tools in China for exerting export control over controlled items and technologies.

Where a quota restriction applies to the export of any item, applications are required to be made to governmental authorities in charge of export quota administration, currently MOFCOM (including its local counterparts) in early November each year to apply for such quota for next year. Successful applicants will each receive a quota certification and then may be able to apply for an export quota license again at MOFCOM.

For controlled items that are not subject to a quota (e.g., nuclear, arms, explosives), export licenses are required. Typically, exporters are required to apply to MOFCOM or other competent authorities. For proposed exports that may have a material influence on national security, public interests or likewise, the application may even be subject to approval by the State Council.[6]

To export restricted technologies, exporters are required to apply for export licenses through a two-step process. First, an exporter shall apply to the department of State Council in charge of foreign economy and trade, currently MOFCOM, which will examine the technologies to be exported along with certain agencies in charge of science and technology. With MOFCOM’s approval, as evidenced by issuing a letter of intent for a technology export license, the exporter may then negotiate the terms of and enter into a technology export agreement with the counterparty. Then, following the execution of the technology export agreement, such exporter will again have to apply to MOFCOM for a formal export license.

2.5 End User and End-Use Certification

For export of missile, nuclear, certain chemical and biological dual-use related products and technologies, exporters are generally required to submit end user and end-use certifications and other application documents to competent governmental authorities. Recipients of such products or technologies shall also undertake that the exported products and technologies will not be (i) used for any purpose other than the declared end-use, or (ii) transferred to any third party other than the declared end user, unless otherwise approved by the Chinese government. In case of violation of such end user and end-use certification, any export licenses already issued may be suspended or cancelled.

2.6 Lists of Items and Technologies Restricted from Free Export

China has maintained controlled items lists setting forth details on the items and technologies that are subject to export restrictions, such as: (i) the Missiles and Missile-related Items and Technologies Export Control List; (ii) Arms Export Control List and Nuclear Export Control List; (iii) Certain Chemicals and Related Equipment and Technologies Export Control List; and (iv) Biological Dual-Use Items and Related Equipment and Technologies Export Control List.

Upon approval of the State Council, MOFCOM and other competent authorities may jointly announce interim export control measures against items and technologies that are not already included in these lists.

2.7 Liabilities for Violations under the Current Export Control Regime

Violations of China’s current export control laws and regulations may be subject to administrative penalties and criminal liability.

Pursuant to the customs-related laws and regulations, as well as the abovementioned export control regulations, administrative penalties range from a warning, confiscation of products to be exported and/or illegal income (if any), and/or a fine up to five times the illegal income, to cancellation of export licenses. In addition, local counterparts of China Customs may take temporary measures to detain suspected perpetrators as well as products to be exported and vehicles used for transportation. Criminal liabilities include a monetary penalty, confiscation of all assets and even imprisonment for severe violations that constitute crimes relating to smuggling, illegal business operations, and license forgery.

3. Reform of China’s Export Control Regime

3.1 Overview

The introduction of the new comprehensive Draft Laws comes on the heels of the U.S.-China trade war, which seemed to have culminated in both countries signing the “Phase One” trade deal on January 15, 2020.[7] Much ink has been spilled over the trade war, which featured the U.S. Bureau of Industry and Security’s (“BIS”) inclusion of Huawei onto the Entity List, the U.S. House of Representatives passing legislation in December 2019 in response to the Uighur conflict in Xinjiang, a move which could impose export controls on U.S.-made items used by the Chinese government for certain surveillance and repressive activities (as elaborated here[8]), recent designations of Chinese entities, and new export controls rules on military end uses and end users in China. In response, China has threatened to publish an “Unreliable Entity List” that could lead to trade sanctions against U.S. companies[9] and also recently imposed sanctions on four U.S. politicians, one congressional committee and one U.S. company.[10] The implementation of the 2020 Draft could arguably provide China with ammunition to counter U.S. export control measures targeting China, and spell wider implications for the international business community in dealing with Chinese goods. This includes potential further complications for European companies that may be caught in the middle of the U.S.-China trade war.

According to Minister of Commerce Zhong Shan at the 15th Session of the 13th National People’s Congress Standing Committee on December 24, 2019, the 2019 Draft drew inspiration from a “common international practice” to regulate trade, and therefore enhances China’s obligations to fulfill its international commitments as well as to safeguard national security interests. This sentiment is also echoed in Article 1 of both Draft Laws.[11]

Broadly speaking, the 2019 Draft addressed key matters such as: (i) the formal establishment of an export control system; (ii) the requirement for exporters to establish an internal compliance review system to monitor export controls; (iii) end user and end-use certifications; and (iv) enhanced penalties for violations of the 2019 Draft.

The 2020 Draft largely resembles the 2019 Draft but is also different in a few ways. For example, (i) the 2020 Draft explicitly applies to foreign entities and individuals who violate such law; (ii) it is no longer a mandatory obligation for exporters to establish an internal compliance review system; and (iii) it is now unclear how long it would take to apply for an export license, among others.

3.2 Scope

3.2.1 General

(a) The 2019 Draft

The 2019 Draft comprised 48 articles that are set out over six chapters. This represents a considerable streamlining of the 2017 Draft that contained 70 provisions.[12] We detail the areas we consider most relevant below. The 2019 Draft provided for the establishment of a unified export control system with extraterritorial reach and several additional new features.

The 2019 Draft specifically targeted China’s nuclear, military, and dual-use items,[13] as well as other goods, technology, and services that could have an impact on China’s international obligations and national security.[14] The State Council and the Central Military Commission are the primary enforcers of the legislation, though responsibility for regulating and licensing the various controlled items will be shared between different state agencies.[15]

(b) The 2020 Draft

The 2020 Draft also has 48 articles that are set out in only five chapters – the second chapter (control policy and list) and the third chapter (control measures) in the 2019 Draft have been consolidated to one chapter in the 2020 Draft, namely, control policy, list and measures. There is no material change to the general scope and coverage of the 2019 Draft, except as described below.

3.2.2 Extraterritoriality

(a) Re-exports, Deemed Exports and Likewise

The 2017 Draft defined “re-export” as the transfer of an item from a jurisdiction outside of China to a third country, and provided that the export control provisions would apply to certain Chinese-origin controlled items or foreign-made items that contain Chinese-origin controlled items that are determined with reference to a “percentage test.”[16]

The above definition of “re-export” has been removed in both Draft Laws, although the reasons for doing so are unclear.[17] As stands, the relevant Article 45 of both Draft Laws states: “The transit, transshipment, through shipment, or re-export of a controlled item, or the export of a controlled item to overseas from special customs supervision areas such as bonded areas and export processing zones, as well as bonded supervision places such as export supervision warehouses and bonded logistics centers shall be governed by the relevant provisions of this Law.”

Yet, while the definition of “re-export” and the de minimis rule were removed in the Draft Laws, a reference to “re-export” remained.

Accordingly, it remains to be seen whether Article 45 of the Draft Laws will include extraterritorial reach and expand to all re-exports of controlled items, such as a U.S. company re-exporting a controlled item that originates from China to Mexico.

Under Article 2 of both Draft Laws, “deemed exports” refers to the provision of regulated goods and technologies to non-Chinese citizens, legal persons, and organizations.[18] Ostensibly, this provision was included to regulate the trade activities of foreign entities based in China with access to controlled equipment or sensitive technical data. Although unlike the 2017 Draft, neither the 2019 Draft nor the 2020 Draft includes the language that it also applies to exports to Taiwan, Hong Kong and Macau, we believe it may still capture exports to such regions based on China’s geopolitical understanding and prior export control practice.

Other trade activities that are captured under the Draft Laws include transit, transshipment and through shipment of controlled items and export via special customs supervision areas and bonded supervision areas and the above noted re-exports.[19]

We expect China to address these questions, specifically whether “re-exports” will include re-exports from a non-Chinese country to a third country, either in a revised draft or in implementing regulations that provide more details and guidance after the 2020 Draft is enacted.

(b) Legal Liabilities of Foreign Perpetrators

The 2020 Draft, however, has brought clarity to legal liabilities of foreign entities and individuals engaged in China, by introducing Article 44, which reads: “An organization or individual outside the territory of the PRC which violates the provisions (…) of the Export Control Law, hinders the performance of non-proliferation and other international obligations (…), or endangers China’s national security and interests, shall be (…) held legally liable.”

3.3 Registration of Exporters

While the requirement of exporters’ filing and registration obligations remains unchanged, the first new feature of the export control system under both Draft Laws is the introduction of a licensing regime for exporters who wish to export controlled items, as well as any other items that exporters know or should know : (i) may threaten national security; (ii) are used in the design or development of weapons of mass destruction or their delivery vehicles; or (iii) are used for terrorism purposes.[20] According to the Draft Laws, the following eight factors will be taken into consideration in assessing a license application: (i) international obligations and commitments; (ii) national security; (iii) type of export; (iv) sensitivity of items; (v) countries or regions the items are destined for; (vi) end user and end-use; (vii) credit history of the exporters; and (viii) any other circumstances as prescribed by laws and regulations.[21]

3.4 Controlled Items List

Another novel feature of the Draft Laws is the creation of a controlled items list. To that end, Article 9 of the 2019 Draft states that three separate lists will be generated for dual-use items, military items, and nuclear items respectively.[22] However, according to Article 9 of the 2020 Draft, it appears only one list is contemplated to include all covered items.

Article 10 of the 2019 Draft contains a further catchall provision that provides that goods, technology, or services that are not otherwise on a controlled items list may nevertheless be placed on a temporary restriction list for up to two years.[23] The 2020 Draft has also prescribed the same[24] but has introduced a new assessment regime prior to the expiration of the two-year temporary restriction period.[25] Items that are subject to a temporary restriction will not be automatically exempted from such restraint. Instead, such temporary restriction may be cancelled, extended or turned into a permanent restriction by including such items into the controlled items list, depending on the result of the assessment.

Neither the 2019 Draft nor the 2020 Draft contains an initial list of controlled and/or restricted items. Although the controlled items list(s) referenced in both Draft Laws is expected to include largely the same items on the existing lists subject to the current export control regime,[26] this could still prove worrying for businesses based in China due to the uncertainty of goods that will eventually make it onto the controlled items lists or the temporary restriction list.

While both Draft Laws primarily cover dual-use items, military items, and nuclear items, we do not expect the 2020 Draft, once enacted, to affect China’s current export quota administration primarily regulating the export of certain plants and livestock.

3.5 End User and End-Use Certifications

Unlike the 2017 Draft that gave regulatory authorities the power to request exporters or importers to provide end user and end-use certifications, Article 17 of the 2019 Draft and Article 15 of the 2020 Draft now make it mandatory for exporters to submit end user and end-use certifications to the national export control authorities.[27] In effect, this appears to be a uniform requirement regardless of the sensitivity of the controlled items exported, which is a significant departure from Article 25 of the 2017 Draft that limited the requirement for certification “based on the degree of sensitivity of controlled items and end users.”[28] The end-use and/or end user certificates may be issued by either end users themselves, or the governments in countries or regions where such end users are located.

Furthermore, to add on an additional layer of compliance requirements, exporters who are aware of changes to the end user or end-use of controlled items must immediately report the changes to the national export control authorities.[29] However, both Draft Laws are unclear on what the consequences are of violating these disclosure obligations.

In addition, importers and end users who violated either end user or end-use certifications may be placed on a controlled list. National export control authorities may impose bans or restrictions on transactions with entities on the list, among other sanctions.[30]

3.6 Entity Lists

3.6.1 Proposed “Unreliable Entity List”

In the midst of the China-U.S. trade war, MOFCOM announced on May 31, 2019 that China will introduce an “unreliable entity list” with an aim to “safeguard the international economy and trade rules and multilateral trading regime” and “object to unilateralism and trade protectionism.”[31] This announcement has been seen as a reaction to BIS’s inclusion of Huawei Technologies Co., Ltd. and its 70 affiliates (collectively, “Huawei”) to its Entity List on May 15, 2019 (as described here[32]). Over the course of several press conferences convened by MOFCOM and the Ministry of Foreign Affairs (“MFA”) in late 2019, spokesmen for the respective agencies repeatedly responded that such a list will be published soon.[33] However, there has not been any further development to date.

Nonetheless, we compare China’s proposed “unreliable entity list” against BIS’s Entity List in the table below.

	China’s Proposed “Unreliable Entity List”	BIS’s Entity List
Background and Purpose	“Certain foreign entities have cut off the supplies or taken other discriminating measures, impairing Chinese companies’ legitimate interests, endangering China’s national security and interests, posing a threat to global industry chain and supply chain, as well as negatively affecting the global economy.”[34] The “unreliable entity list” will be introduced to “safeguard the international economy and trade rules and multilateral trading regime, in objection to unilateralism and trade protectionism, safeguard China’s national security, public interests and companies’ legitimate rights and interests.”[35]	BIS first published the Entity List in February 1997 as part of its efforts to inform the public of entities that have engaged in activities that could result in an increased risk of the diversion of exported, re-exported, or transferred (in-country) items to weapons of mass destruction (WMD) programs. Since its initial publication, grounds for inclusion on the Entity List have expanded to activities sanctioned by the State Department and activities contrary to U.S. national security and/or foreign policy interests.[36]
Grounds for Inclusion	When weighing which entities might be included, the following factors will be taken into consideration: (i) whether such entities have implemented a blockade, cutoff of supplies, or other discriminating measures targeting Chinese entities; (ii) whether such entities’ conducts are based on non-commercial purpose and violate market rules and the spirit of contract; (iii) whether such entities’ conducts have caused substantial damage to Chinese companies or relevant industries; and (iv) whether such entities’ conducts pose a threat or potential threat to national security.[37]	Pursuant to Section 744.11(b) of the Export Administration Regulations (the “EAR”), the Entity List identifies persons or organizations reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States.[38]
Legal Basis	Foreign Trade Law; Anti-Monopoly Law; and National Security Law.	Export Control Reform Act of 2019; International Emergency Economic Powers Act; the EAR.
Effect after Inclusion	It is unclear what effect inclusion to such list will have. We expect China to at least impose restrictions on import from and export to the included entities, and such restrictions may even extend to their respective affiliates.	The Entity List imposes specific license requirements for the export, re-export, or transfer (in-country) of specified items to the persons named on it. The persons on the Entity List are subject to individual licensing requirements and policies supplemental to those found elsewhere in the EAR. BIS considers that transactions of any nature with listed entities carry a “red flag” and recommends that U.S. companies proceed with caution with respect to such transactions.[39]
Relief	Listed entities will be entitled to object. After corrective measures are taken, relevant authorities may consider adjusting the “unreliable entity list.”[40]	Listed parties may seek removal from such list.

3.6.2 Introduction of Embargo, “Blacklist,” and National/Regional Risk Assessment

The 2017 Draft, the 2019 Draft and the 2020 Draft formally introduce trade concepts such as embargoes, “blacklists,” and national/regional risk assessments into China’s export control regime. Article 8 of both Draft Laws allows national export control authorities to conduct an assessment of countries and regions where controlled items are exported, identify the level of risks, and take corresponding control measures. Article 10 of both Draft Laws now makes it possible for national export control authorities to ban the export of certain items or to certain countries or regions or to certain persons (both individuals and entities), in order to “fulfill … international obligations and safeguard national security.” Article 18 of the 2020 Draft and Article 20 of the 2019 Draft also introduce a controlled list of importers and end users which (i) violate end user or end-use certifications as stated above, (ii) may impair national security, or (iii) use controlled items for terrorism purposes. Pursuant to the 2020 Draft, transactions with those on the controlled list will be restricted, banned or suspended.[41] These additions arguably will provide a legal framework and broad discretion for China to impose export control measures on an ad hoc basis.

3.7 Liabilities for Violations under the Draft Laws

3.7.1 Enhanced Penalties in Both Draft Laws

Finally, both Draft Laws significantly ratchet up the penalties for violations in contrast to the 2017 Draft by providing for stiffer fines. Examples of violations under the Draft Laws include, but are not limited to: (i) unauthorized export of controlled items; (ii) obtaining an export license for the export of controlled items through bribery or other improper means; (iii) falsifying or trading an export license; or (iv) conducting business with controlled importers or end users in violation of the Draft Laws.[42] Article 30 of the 2019 Draft and Article 28 of the 2020 Draft provide Chinese authorities with enforcement powers if they suspect violations of the new export control laws. Penalties for violations include confiscation of illegal income (if any) and a fine up to a multiple of the amount of illegal income if such amount is greater than a certain threshold or, if lower, a cap, in each case depending on the specific type of violation. Other administrative penalties include but are not limited to suspension of business for rectification as well as cancellation of export licenses.[43]

The enforcement powers given to Chinese authorities under the 2019 Draft, which now largely remain the same in the 2020 Draft, have been criticized by international organizations. For example, the Federation of German Industries (“BDI”) believes the missing independent judicial oversight is a key problem of the new export control regime.[44] It views the Chinese authorities’ enforcement powers available upon suspicion of a violation as highly problematic. The BDI also suggests publishing decisions about further export controls and measures in order to increase transparency.[45]

3.7.2 China’s Export Control Enforcement Actions

China’s export control enforcement actions result in liabilities ranging from administrative penalties imposed by China Customs to criminal fines and imprisonment.

Existing regulations[46] relating to export control do not specifically authorize China Customs to impose administrative fines. Instead, China Customs usually does so under Articles 14 and 15 of Implementation Regulations of Customs on Administrative Penalties (2004) when parties are seeking to export controlled items without export licenses[47] or when violations would compromise “the accuracy of China Customs’ statistics,” “China Customs’ supervision and administration,” or “China’s administration of licenses.”[48] Pursuant to these articles, a fine would range from RMB1,000 to RMB30,000 (approximately US$ 140 to US$ 4,200) or no more than 30% of the value of exported goods.[49] The value of goods sought to be illegally exported without the required export license, in most administrative cases we were able to find from publicly available information, was under RMB 0.5 million (approximately US$ 70k), with a few at around RMB 2 million (approximately US$ 280k), and one at around RMB 4 million (approximately US$ 560k). Fines imposed by China Customs ranged from a few thousand RMB (approximately a few hundred US dollars) to RMB 284k (approximately US$ 40k), representing 1% – 18% of the value of goods at issue.

Exporters, export agencies and their agents may be held criminally liable in severe violations, for example, when large amounts of valuable controlled items are illegally exported. Fines imposed on exporters may be as high as RMB 14 million (approximately US$ 2 million), and individuals in charge of such exporters or export agencies facilitating the illegal export are typically sentenced to less than five years in prison and fined for a few hundred thousand RMB. The most severe penalty against individuals we were able to find in the public domain was a fine of around RMB 1 million (approximately US$ 156k)[50] and imprisonment of 13 years.[51]

3.7.3 Potential Impact of the Draft Laws on Future Enforcement Actions

As discussed above, the existing export control laws and regulations do not themselves authorize China Customs to impose administrative penalties. Accordingly, China Customs has to resort to other regulations where the prescribed penalties are generally inconsequential. Once the 2020 Draft is enacted, China Customs will be authorized to impose significantly higher fines. In the case of exporting controlled items without an export license, the fine will range from five to 10 times the illegal income with a minimum of RMB 500k (approximately US$ 70,625 at the prevailing exchange rate) even if there is no illegal income,[52] almost twice the administrative fine imposed by China Customs in the most serious violation noted above. If exporters transact with those on the “blacklist” described in Section 4.5 below, the fine can be as high as 10 to 20 times the illegal income with a minimum of RMB 500k.[53]

Most severe export control violations will continue to be subject to criminal liabilities under China’s criminal law.

3.8 Internal Compliance Review System

3.8.1 2019 Draft

More significantly, the 2019 Draft made it mandatory for all exporters to establish an internal compliance review system to monitor their export control obligations. An internal compliance review system is required in order to be eligible for certain licenses – this is in contrast to the 2017 Draft which simply “encouraged” the establishment of an internal compliance program.[54] It is worth noting that under the current export control laws and regulations, only exporters of nuclear dual-use items and technologies are required to establish an internal control system. However, the 2019 Draft did not specify how regulators should evaluate this internal compliance review system and what constitutes a significant violation of this obligation.

3.8.2 2020 Draft

In contrast to the 2019 Draft, establishing an internal compliance system is no longer a mandatory obligation under the 2020 Draft. Article 14 of the 2020 Draft encourages, instead of mandating, exporters to establish such system by granting simplified export measures to those that have established such internal compliance review system that works well.

4. Impact of the Draft Laws on International Trade Relations

The reference to extraterritoriality of the Draft Laws means that China’s new export control regime, if and when the extraterritoriality is enacted, will impact businesses within and outside China that deal with Chinese controlled items.[55] That said, the vagueness of several of the Draft Laws’ provisions creates a layer of uncertainty within the international business community, specifically regarding its extraterritorial application and as to which activities specifically will be affected. This could be a deliberate move on China’s part in order to create sufficient room to augment the scope and reach of this export control regime through the issuance of supplementary regulations.[56]

For example, even with the abolishment of the definition of “re-exports” (but not the concept itself) and references to a de minimis rule, it is unclear if the 2020 Draft will apply to the re-export of foreign-made items that contain Chinese-origin controlled items to a jurisdiction outside of China. Following a public consultation, various trade associations from the U.S., Europe, and Japan have made calls for the 2019 Draft to clarify the scope of the affected re-export activities,[57] while the 2020 Draft remains unchanged in this regard.

Furthermore, the requirements to determine end-use and end-users for exporters may also give rise to increased compliance costs for businesses in China as they now have to undertake more stringent third-party due diligence into their trade counterparties, in order to avoid a potential violation of any controlled items list or restricted list that is published pursuant to the 2020 Draft.

Notwithstanding the above, both Draft Laws appear to be a more conciliatory version of the 2017 Draft in a move that is arguably designed to ease U.S.-China trade tensions. Of note is the removal of a clause that referred to retaliatory measures that China could take in response to “discriminatory export control measures” taken by other countries against it.[58] It therefore remains to be seen if Beijing will ever follow through with publishing an “Unreliable Entity List” in retaliation against U.S. trade sanctions.

4.1 U.S.-China Trade Relationship

For U.S. companies, what may prove most worrying about China’s new export control regime may be the highly publicized “unreliable entity list” and the “blacklist” to be formulated pursuant to the Draft Laws, in China’s apparent attempt to counter the U.S. sanctions, as well as the risk of leaks of trade secrets and other intellectual property in the case of investigations by China’s national export control authorities.

Based on the principle of reciprocity, a term frequently used by both countries’ governments as justification for its hostile actions against one another, if the U.S. government continues to target Chinese technology companies using its “Entity List” or similar tools, it is conceivable that China will follow through its original announcement for the establishment of the “unreliable entity list” and following the enactment of the 2020 Draft, the “blacklist,” and use these legal measures to counter U.S. export control measures targeting China.

The Draft Laws specify what measures China’s national export control authorities may take in order to investigate a suspected violation, and therefore raising concerns for potential leaks of trade secrets and other intellectual property.[59] Perhaps anticipating such concerns, both Draft Laws also require the authorities and their staff to maintain confidentiality of trade secrets obtained during such investigations.[60]

4.2 EU-China Trade Relationship

The 2020 Draft will likely have an impact on EU-China trade relationships and European companies in particular.

In the past, EU companies had to deal with the extraterritoriality of U.S. sanctions and political pressure from both the U.S. and China, as exemplified by the inclusion of the Chinese telecommunications company Huawei and its named affiliates on the U.S. Entity List in May 2019.[61]

In the future, EU companies will have to deal with the extraterritoriality of U.S. and Chinese sanctions and political pressure from both the West and East.

On the legal front, any Sanctions and Export Compliance Management System of an EU company will have to cover not only national law and EU law, but also be mindful of the extraterritorial reach of both the U.S. and the Chinese Sanctions and Export Controls.

If an entity were to be blacklisted or greylisted by the U.S., but not by China, or vice versa, EU companies would have to decide with whom to do business. As many companies might not have the resources to continuously monitor both the U.S. and the Chinese regime, they might choose to reorganize their supply chain in a way to only source U.S. or Chinese products to limit their legal exposure.

When it comes to export controls in the EU, power usually rests with the various national governments to implement their own laws.[62] Despite the lack of ability to implement EU-wide export controls, EU governments could, on a national level, align with U.S. export controls to ensure a common approach towards China.[63] Otherwise, there is an increasing risk for European companies to be subject to U.S. sanctions. One suggested approach for the EU would thus be to work together with the U.S. to restrict China’s ability of gaining access to advanced technologies.[64]

However, if China uses export controls to counter U.S. sanctions, and if, at the same time, the U.S. imposes further tariffs on EU goods, this could drive European companies closer to China.[65]

On the political front, European manufacturers could also find themselves sidelined by the U.S.-China Phase One deal as elaborated above. A study by the American Chamber of Commerce, for example, predicted that German and French manufacturing sectors may be the most adversely affected by China’s commitment to buy $200 billion more in goods from the U.S. in the Phase One deal.[66]

Finally, this conflict could also lead to European companies diversifying their portfolios by using goods from other third countries.

Overall, after the 2020 Draft is enacted, European companies could find themselves in the difficult position of having to choose between imports from the U.S. or China and evaluating where the larger legal risks and economic and political benefits are.

5. Conclusion

Both the 2019 Draft and the 2020 Draft change the 2017 Draft in many ways and provide for a comprehensive Chinese export control regime. Besides a few clear requirements, the 2020 Draft remains opaque as to its exact scope & specifically regarding its contemplated extraterritorial reach, and has the potential of making it challenging for companies to navigate through China’s new export control regime.

It is expected that, as is common with the introduction of a new law in China, the Chinese authorities will, in time, issue implementing regulations that provide more details and interpretation of this law, specifically relating to the concept and application of extraterritoriality.

Companies should monitor the current developments, prepare their Sanctions and Export Compliance mechanisms to be able to cope with a comprehensive Chinese Export Control regime and pay special attention to further supplementary Chinese regulations.

________________________

[1] Export Control Law of the People’s Republic of China (Draft), available at https://www.cistec.or.jp/service/china_law/202001_pubcom2_souan.pdf.

[2] See Xiaoming Liu, Royal United Services Institute, Upgrading to a New, Rigorous System – Recent Developments in China’s Export Controls (Mar. 2016), https://rusi.org/sites/default/files/201603_op_upgrading_to_a_new_rigorous_system_en.pdf.

[3] See Article 2 of the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002), Article 2 of the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007), and Article 2 of the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002) for example.

[4] See Announcement on Imposing Interim Export Control Measures on Military and Civil Dual-Use Unmanned Aerial Vehicles issued on June 25, 2015 with effect from July 1, 2015.

[5] See Article 28 of the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007).

[6] See Article 11 of the Regulations on Control of Nuclear Export (2006), Article 16 of the Regulations on Control of Arms Export (2002), and Article 11 of the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002) for example.

[7] See China Briefing, The US-China Trade War: A Timeline (Feb. 26, 2020), https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/.

[8] See Gibson, Dunn & Crutcher LLP, 2019 Year-End Sanctions Update (Jan. 23, 2020), https://www.gibsondunn.com/2019-year-end-sanctions-update/.

[9] Jeff Black/Daniel Flatley, Bloomberg News, China Hints U.S. Blacklist Imminent in Threat to Trade Talks (Dec. 3, 2019), https://www.bloomberg.com/news/articles/2019-12-03/china-hints-u-s-blacklist-imminent-in-threat-to-trade-talks.

[10] Michael O’Kane, EU Sanctions, China Designates 4 US Politicians & Congressional Commission (July 13, 2020), https://www.europeansanctions.com/2020/07/china-designates-4-us-politicians-congressional-commission/; and Michael O’Kane, EU Sanctions, China Designates Lockheed Martin for Taiwan Arms Deal (July 14, 2020), https://www.europeansanctions.com/2020/07/china-designates-lockheed-martin-for-taiwan-arms-deal/.

[11] Xiaolei Pu, Legal Daily, Proposed Inclusion of Military Items and Nuclear into Covered Items (Dec. 24, 2019), http://www.npc.gov.cn/npc/ckgzlf003/201912/03bf295574ad4d5caba56c2fd7a9af24.shtml.

[12] Leian Kae Naduma, Business Times, China Releases Draft Export Control Law, The Country’s First (Jan. 17, 2020), https://www.btimesonline.com/articles/125133/20200117/china-releases-draft-export-control-law-countrys-first.htm.

[13] This refers to “goods, technologies and services that have civil uses, and also have military use or enhanced military potential, particularly those which could be used for the design, development, production, or use of weapons of mass destruction.” See Article 2 of the 2019 Draft.

[14] http://www.npc.gov.cn/npc/ckgzlf003/201912/1c9cab8e27874d51ae79196802b1d894.shtml; see also Article 2 of the 2019 Draft.

[15] Article 5 of the 2019 Draft.

[16] Article 64 of the 2017 Draft.

[17] Pursuant to the 2017 Draft, “re-export” is defined as “the export of controlled items or foreign products containing controlled items whose value reaches a certain percentage from overseas to other countries (regions).”

[18] Article 2 of the 2019 Draft and Article 2 of the 2020 Draft.

[19] Article 45 of the 2019 Draft, which states the provisions of law also apply to these trade activities. As such, we expect national export control authorities (or jointly with China Customs) to still regulate these trade activities. Article 45 of the 2020 Draft is also similar to this.

[20] Articles 13 and 15 of the 2019 Draft and Article 12 of the 2020 Draft.

[21] Article 13 of the 2019 Draft and Article 13 of the 2020 Draft.

[22] Article 9 of the 2019 Draft.

[23] Article 10 of the 2019 Draft.

[24] Article 9 of the 2020 Draft.

[25] Ibid.

[26] See Catalog of Import and Export Licenses Administration of Dual-use Items and Technologies promulgated by MOFCOM and China Customs on December 31, 2005 and last amended on December 31, 2019; Arms Export Administration List promulgated by former SASTIND and PLA Armaments on November 1, 2002; and Nuclear Export Administration List promulgated by former SASTIND on June 28, 2001 and amended by China Atomic Energy Authority, MOFCOM, MFA and China Customs on June 27, 2018.

[27] See Article 25 of the 2017 Draft, Article 17 of the 2019 Draft and Article 15 of the 2020 Draft.

[28] See Joint Comments by 11 Industrial Associations of U.S. and Japan (Jan. 26, 2010), available at: cistec.or.jp/english/export/china_law/200210-english.pdf.

[29] See Article 18 of the 2019 Draft and Article 16 of the 2020 Draft.

[30] See Article 29 of the 2017 Draft, Article 20 of the 2019 Draft and Article 18 of the 2020 Draft.

[31] See MOFCOM, MOFCOM: China to Establish the “Unreliable Entity List” Regime (May 31, 2019), http://www.mofcom.gov.cn/article/i/jyjl/e/201905/20190502868927.shtml.

[32] See Gibson, Dunn & Crutcher LLP, Citing a National Emergency, the Trump Administration Moves to Secure U.S. Information and Communications Technology and Service Infrastructure (May 20, 2019), https://www.gibsondunn.com/citing-national-emergency-trump-administration-moves-to-secure-us-information-and-communications-technology-service-infrastructure/. On August 21, 2019, the Trump Administration increased its Entity List designation of Huawei affiliates to over 100 entities.

[33] On a press conference of MOFCOM on August 22, 2019, a MOFCOM spokesman responded that the “unreliable entity list” was “going through internal procedures and would be released recently.” A spokesman from MFA repeated the same on October 8, 2019, following the U.S.’s blacklisting an additional 28 Chinese entities on October 7, 2019.

[34] See MOFCOM, MOFCOM: China to Establish the “Unreliable Entity List” Regime (May 31, 2019), http://www.mofcom.gov.cn/article/i/jyjl/e/201905/20190502868927.shtml.

[35] Id.

[36] See FAQs – Entity List FAQs, available at https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_105.

[37] See Reasons to Introduce the “Unreliable Entities List” Regime? MOFCOM’s Response (June 4, 2019), http://coi.mofcom.gov.cn/article/y/gnxw/201906/20190602869699.shtml.

[38] See Addition of Certain Entities to the Entity List (Oct. 9, 2019), https://www.federalregister.gov/documents/2019/10/09/2019-22210/addition-of-certain-entities-to-the-entity-list.

[39] See FAQs – Entity List FAQs, available at https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_104 and https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_118.

[40] See Sina Finance, Authorities: MOFCOM’s Interpretation of China’s “Unreliable Entity List” Regime (June 2, 2019), https://cj.sina.com.cn/articles/view/1704819467/659d7b0b01900ux8q.

[41] It is also noteworthy that pursuant to Article 20 of the 2019 Draft, simplified export measures (if previously granted to the exporter) will no longer be applicable to transactions with those on the controlled list. This is no longer the case in the 2020 Draft.

[42] See Chapter 5 of the 2019 Draft and Chapter 4 of the 2020 Draft.

[43] Id.

[44] Nikolas Kessels, BDI, China’s Export Control, Statement regarding the Second Draft of China’s National Export Control (Jan. 23, 2020), https://bdi.eu/artikel/news/peking-legt-neuen-vorschlag-fuer-exportkontrollgesetz-vor/ (in German).

[45] Id. See also Art. 1 (5) 1. Council Decision (CFSP) 2019/1560 of September 16, 2019 amending Common Position 2008/944/CFSP defining common rules governing control of exports of military technology and equipment. Based on this decision by the European Council, EU member states need to submit information on their exports of military technology and equipment for transparency purposes.

[46] For example, the Regulations on Control of Arms Export (2002), the Regulations on Control of Nuclear Export (2006), the Administrative Regulations on Monitored Chemicals (2011), the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007), the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002), and the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002).

[47] See Article 14 of the Implementation Regulations of Customs on Administrative Penalties (2004).

[48] See Article 15 of the Implementation Regulations of Customs on Administrative Penalties (2004).

[49] Paragraphs (4) and (5) of Article 15 of the Implementation Regulations of Customs on Administrative Penalties (2004) also provide for fines to be imposed where violations would compromise “China’s tax collection” or “foreign exchange or export tax rebate administration.” Such fines might be higher than those set forth above but these paragraphs are rarely cited by China Customs in administrative penalty cases relating to export control of dual-use items, arms, nuclear, monitored chemicals or likewise.

[50] See the Case of Yuhong Peng’s Smuggling General Goods available here, (2009) Xia Xing Chu Zi No. 25, where Yuhong Peng assisted a few clients in exporting 1,631,031 kilograms of flour without a valid export license by intentionally and falsely declaring flour as non-controlled goods. Flour was subject to China’s export quota restrictions. Yuhong Peng was found guilty for smuggling general goods and was sentenced to an imprisonment of 10.5 years and fined RMB 1,112,443.77 (approximately US$ 156,980.71 at the prevailing exchange rate).

[51] See First Trial Criminal Judgement of Huizhou Haihang Industrial Co., Ltd. and Huizhou Jiangfeng Industrial Development Co., Ltd. available here, (2016) Yue 13 Xing Chu No. 11, where Huizhou Haihang Industrial Co., Ltd., Huizhou Jiangfeng Industrial Development Co., Ltd., their respective key persons in charge and a few other individuals exported 689.086 tons of rare earth metals without a valid export license by intentionally and falsely declaring rare earth as non-controlled goods. Huanyong Xu, the manager of Huizhou Haihang Industrial Co., Ltd. was sentenced to an imprisonment of 13 years.

[52] See Article 34 of the 2020 Draft.

[53] See Article 37 of the 2020 Draft.

[54] Article 36 of the 2017 Draft; see also Article 14 of the 2019 Draft.

[55] See Leian Kae Naduma, Business Times, China Releases Draft Export Control Law, The Country’s First (Jan. 17, 2020), https://www.btimesonline.com/articles/125133/20200117/china-releases-draft-export-control-law-countrys-first.htm.

[56] Finbarr Bermingham, South China Morning Post, Trade war clues sought in China’s ‘ambiguous’ new export control law (Dec. 31, 2019), https://www.scmp.com/economy/china-economy/article/3044112/trade-war-clues-sought-chinas-ambiguous-new-export-control.

[57] See Statement by 11 U.S. and Japanese industrial associations, Joint Comments by Industrial Associations of the United States and Japan on China’s Revised Draft Export Control Law (Jan. 26, 2020), https://www.cistec.or.jp/english/export/china_law/200210-english.pdf and Statement by 14 European and Japanese industrial associations, Joint Comments by Industrial Associations of Europe and Japan on China’s Revised Draft Export Control Law (Jan. 21, 2020), https://www.cistec.or.jp/service/china_law/20200123-english.pdf.

[58] Article 9 of the 2017 Draft.

[59] See Article 30 of the 2019 Draft and Article 28 of the 2020 Draft. Such measures include “entering into the place of business … for inspection,” “viewing and copying … relevant agreements, accounting books, business correspondence …” and “seizing and detaining relevant items.”

[60] See Article 31 of the 2019 Draft and Article 29 of the 2020 Draft.

[61] See Benjamin Wilhelm, World Politics Review, Why America’s Global Campaign Against Huawei Is Failing (Jan. 29, 2020), https://www.worldpoliticsreview.com/trend-lines/28503/why-europe-is-resisting-trump-s-campaign-against-huawei-china.

[62] Limited exceptions apply in terms of military and dual-use goods.

[63] Id.

[64] See Carisa Nietsche/Sam Dorshimer, The Hill, America and Europe will lose to China in transatlantic trade war (Jan. 31, 2020), https://thehill.com/opinion/international/480942-america-and-europe-will-lose-to-china-in-transatlantic-trade-war.

[65] Id.

[66] See Greg Knowler, Journal of Commerce, Europe faces $11 billion hit from US-China ‘phase one’ deal: study (Mar. 27, 2020), https://www.joc.com/regulation-policy/europe-faces-11-billion-hit-us-china-%E2%80%98phase-one%E2%80%99-deal-study_20200327.html.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Chris Timura, Fang Xue, Qi Yue, Xuechun Wen, Joerg Bartz and Richard Roeder.

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
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R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

1. Legislative / Regulatory Developments

2. Merger Control

2.1 Prohibition Decision

2.2 Conditional Approval Decisions

2.3 Enforcement Against Non-Notified Transactions

3. Non-Merger Enforcement

a. Scope of the Import Ban

a. Establishing “Clear and Convincing” Evidence

b. Due Diligence

a. The European Union (“EU”)

b. United Kingdom

c. Canada

d. Australia

e. New Zealand

1. Targeting the digital economy

2. Substantive changes

3. Increased penalties

1. Legislative / Regulatory Developments

2. Merger Control

2.1 Conditional Approval Decisions

2.2 Enforcement Against Non-Notified Transactions

3. Non-Merger Enforcement

4. Civil Litigation

4.1 Tech Companies Targeted

4.2 Follow-on Litigation

Contents

I. U.S.-China Relationship

A. Protecting Communications Networks and Sensitive Personal Data

B. TikTok and WeChat Prohibitions and Emerging Jurisprudence Limiting Certain Executive Authorities

C. Slowing the Advance of China’s Military Capabilities

D. Promoting Human Rights in Hong Kong

E. Promoting Human Rights in Xinjiang

F. Trade Imbalances and Tariffs

1. Section 232

2. Section 301

G. China’s Counter-Sanctions – The Chinese Blocking Statute

H. New Chinese Export Control Regime

II. U.S. Sanctions Program Developments

A. Iran

B. Venezuela

C. Cuba

1. Designations and Remittance Restrictions

2. State Sponsor of Terrorism Determination

3. Travel Restrictions

4. Helms-Burton Act

D. Russia

1. CAATSA Section 224 Russian Cyber Sanctions

2. CAATSA Section 231 Russian Military Sanctions

3. CAATSA Section 232 Nord Stream 2 and TurkStream Sanctions

4. Other Recent Russian Designations

E. North Korea

1. NKSR Amendments

2. Ballistic Missile Procurement Advisory

3. SDN Designations in the Shipping Industry

4. Criminal Enforcement

F. Syria

G. Other Sanctions Developments

1. Belarus

2. Ransomware Advisory

3. Art Advisory

4. Hizballah Designations

5. International Criminal Court-Related Designations

III. U.S. Export Controls

A. Commerce Department

1. Emerging Technology Controls

2. Foundational Technology Controls

3. Removal of CIV License Exception

4. Direct Product Rule Change

5. Expanded Crime Control and Human Rights Licensing Policy

B. State Department

1. Directorate of Defense Trade Controls (DDTC)

2. Bureau of Democracy, Human Rights, and Labor

IV. European Union

A. EU-China Relationship

B. EU Sanctions Developments

1. EU Human Rights Sanctions

2. EU Cyber Sanctions

3. EU Chemical Weapons Sanctions

4. EU Iran Sanctions & Judicial Review

5. EU Venezuela Sanctions