On May 20, 2024, the PRC Ministry of Commerce (MOFCOM) announced the inclusion of three U.S. companies on its unreliable entities list over sales of arms to Taiwan. We discussed the implementation of the Unreliable Entity List here. The move mimics similar designations in February 2023, which we wrote about here, and follows recent actions by the BIS and Treasury to apply new export controls and sanctions on Chinese entities for allegedly doing business with Russia.
Pursuant to the action, MOFCOM added General Atomics Aeronautical Systems, General Dynamics Land Systems, and Boeing Defense, Space & Security to the Unreliable Entity List. Pursuant to the designation, the following measures were also included:
- Prohibiting the entities from any import and export transactions with China;
- prohibiting the entities from any new investment in China;
- prohibiting the entry into China of any senior management of the entities; and
- revoking the visas, work permits, and residence permits of any senior management of the entities.
MOFCOM also levied a fine on Boeing Defense, Space & Security for double the amount of its sales contracts with Taiwan since the implementation of the Unreliable Entity List, to be paid within 15 days after the announcement to avoid being subject to additional fines.
The announcement also warned that there was evidence that Caplugs Corporation (USA) circumvented the Provisions on the Unreliable Entity List by transferring goods purchased from China to Unreliable Entities. For companies doing business with China in critical industries, this should serve as a warning that China is scrutinizing the path of China-sourced products and that secondary sanctions could be on the table. At the same time, it informs Chinese domestic companies of the need to conduct thorough due diligence and take measures to ensure that relevant goods, technologies, and services are not transferred to entities on the Unreliable Entity List.
While the listing of entities on the Unreliable Entity List is not a new step, the warning regarding potential secondary sanctions is notable. Companies procuring technology from China for distribution should consider modifications to policies and procedures for compliance with Chinese law in mind. Likewise, companies doing business in the region should have, and periodically review, contingency plans.
Winston has a strategic alliance with a Chinese firm known as YuandaWinston, through which we are able to assist with Chinese law matters.
Kai Zhan, Partner at YuandaWiston, also contributed to this blog.
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