By: Li Li of Chance Bridge Partners
On January 9, 2021, the Ministry of Commerce of China issued new Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Laws and Other Measures ("the Counteracting Rules"). The Counteracting Rules are proposed to counteract the negative impact on Chinese entities (citizens, legal persons or other organizations) caused by unjustified extra-territorial application of foreign laws and other measures, and to safeguard China's national sovereignty, security and development interests.
The Counteracting Rules came into effect immediately. A few legal experts are of the view that China is pushing back against a flurry of US sanctions with the new Rules which protect Chinese firms from unjustified extra-territorial application of foreign laws, especially US secondary sanctions. In recent years, the US government has continued to target Chinese entities and has placed hundreds of Chinese entities in US sanction lists.
Counteracting rules to fight against the extra-territorial application of foreign laws are not new. The US and EU have respectively adopted their own counteracting rules. China's new Rules are modeled on the US and EU counterparts.
We will briefly introduce the key points of the Counteracting Rules.
1. When will the Counteracting Rules be Applied?
The Counteracting Rules will be applied if the extra-territorial application of foreign laws and other measures is (1) in violation of international law and the basic principles of international relations, and (2) unjustifiably prohibits or restricts Chinese entities from engaging in normal economic, trade and related activities with a third country (or region) or its entities.
It remains to be seen whether the Counteracting Rules will extend to cover situations in which a Chinese entity engages in a transaction with another US-sanctioned Chinese entity. In practice, a Chinese entity may be prohibited or restricted by US laws to do business with another US-sanctioned Chinese entity. There are a few Chinese entities that refuse to do business with other US-sanctioned Chinese companies for fear of being sanctioned too.
2. What is the Scope of Chinese Entities?
The Counteracting Rules only list citizens, legal persons, and other Chinese organizations. They are not clear whether (1) branches of foreign companies located in China, (2) foreign subsidiaries incorporated in China, (3) Chinese subsidiaries incorporated in foreign countries, (4) Chinese branches based in foreign countries, (5) Chinese citizens residing in foreign countries, or (6) other foreign agencies based in China will be deemed as Chinese entities.
3. How to Decide Whether the Application of Foreign Laws and Other Measures is Unjustified?
Chinese authorities will assess and determine whether there exists unjustified extra-territorial application of foreign laws and other measures by taking into account the following factors: (1) if the application violates international law or the basic principles of international relations; (2) the potential impact on China's national sovereignty, security and development interests; (3) the potential impact on the legitimate rights and interests of Chinese entities; or (4) other factors that shall be taken into account.
The new Rules only provide rough standards for the competent Chinese authorities to make an assessment and decision. The competent authorities accordingly have a wide discretion.
4. What Procedure is Provided for Chinese Entities to Obey the Counteracting Rules?
First, if a Chinese entity is prohibited or restricted by foreign laws and other measures from engaging in normal economic, trade and related activities with a third country (or region) or its entity, the Chinese entity must truthfully report such matters to the competent Chinese authorities within 30 days. The report will be confidential if so requested.
Second, after receiving the report, the authorities will assess the situation. If the authorities find that there exists unjustified extra-territorial application of foreign laws and other measures, it may issue a Prohibition Order to direct the reporting entity not to accept, execute, or observe the relevant foreign laws and other measures.
Third, if it nevertheless still wishes to obey the relevant foreign laws and other measures, the reporting entity may apply to the authorities for exemption from compliance with the Prohibition Order. The reporting entity must submit to the authorities a written application with the reasons for the exemption and the scope of exemption.
Fourth, within 30 days from the date of acceptance of the application, a decision on whether to approve the exemption shall be made. The decision shall be made more quickly in the event of an emergency.
5. What Will the Result be if a Party Complies with the Foreign Laws and Other Measures Within the Scope of the Prohibition Order?
If a party infringes upon the legitimate rights and interests of a Chinese entity because of the party's compliance with foreign laws and other measures within the scope of the prohibition order, the Chinese entity may institute a legal proceeding in a Chinese court to claim compensation from the party if the party is not granted exemption.
This includes foreign entities. Therefore, even a foreign party needs to apply for exemption from the Chinese authorities if it does business with a Chinese entity.
Further, the Counteracting Rules also provide that if a judgment or ruling made in accordance with foreign laws and other measures within the scope of the Prohibition Order causes losses to a Chinese entity, the Chinese entity may institute legal proceedings in a Chinese court and claim compensation from the party who benefits from the judgment or ruling.
In fact, this clause may cause significant concerns about how to define the party who benefits from the judgment or ruling. Note that there is no clear definition about the scope of compensation or whether the compensation covers indirect losses.
6. What Will the Result be if a Chinese Entity Does Not Report the Possible Unjustified Extra-territorial application of Foreign Laws and Other Measures or Fails to Obey the Prohibition Order?
If a Chinese entity fails to truthfully report or obey the Prohibition Order, the authorities may give (1) a warning, or (2) an order to rectify the failure within a specified period. In addition, they may concurrently impose a fine according to the severity of the circumstances.
7. What Needs to be Done by Parties Who Engage in Cross-Border Business Involving the Counteracting Rules?
The Counteracting Rules are very rough and general. There are many unanswered questions. Therefore, we suggest that companies with significant business interests in China tread carefully and pay close attention to the implementation and development of the Rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.