Question: How is the sanctions landscape likely to evolve in 2021 between China and the new Biden administration?

Kim Frisinger

One of the key challenges the Biden administration faces for its China policy is how to fashion a cohesive and focused approach while reuniting Western and Indo-Asian partners (such as Japan, Korea and India) who have mostly been excluded from aligning China policies during the four years of the Trump administration. Rebuilding consensus among its partners takes on an historic significance for the Biden administration in the face of seemingly widening multilateral differences between China and the West. After several years of discussions and negotiations with China related to a wide range of trade, intellectual property and human rights issues, the Trump administration took its most significant action based on its perception of increased Chinese militarization. Trump initiated sanctions on November 12, 2020 against Chinese military linked companies, of which a list of entities was designated (such as Huawei, Hikvision, China Mobile Communications and Xiaomi). These sanctions created problems for both US and international investors and MNCs. A number of those sanctioned companies are listed on US exchanges with shares held by US investors or have important supply chain relationships with US companies.

So, the challenge for investors and foreign operators in China in the early days of the Biden administration is to understand the roadmap the administration will craft over the next four years. While Biden’s administration is likely to roll back some of Trump foreign policies, the administration appears determined to hold a fairly hard line with China. Biden has taken firm steps to re-solidify alliances, especially with the EU. Simultaneously, Antony Blinken’s recent Alaska meeting with his Chinese counterpart, Yang Jiechi, adopted a confrontational approach, eliciting a similar response from the Chinese side. While many anticipated a softening of the China-US rhetoric, just the opposite occurred. Any relaxation of China sanctions now appears unlikely any time soon, although it remains to be seen whether the timelines of implementation will be followed. There is likely to be increased pressure on the US administration from US investors and MNCs with significant China exposure, as China represents a key growth market. The situation will also be exacerbated by potential friction from both sides in the region, related primarily to China’s Taiwan reunification ambitions and its perceived territorial expansion goals.

Nick Turner

In March 2021, the United States, the EU, the UK, and Canada announced coordinated sanctions against a total of four PRC officials and one entity related to China’s Xinjiang Uyghur Autonomous Region (XUAR). Within days, the PRC Ministry of Foreign Affairs reacted by declaring that a total of 22 individuals and nine entities—including a prominent UK barristers’ chamber—would be subject to a variety of retaliatory sanctions restricting them from entering mainland China, Hong Kong, and Macao and doing business with China or Chinese persons. The takeaways: (1) the Biden administration is picking up where the Trump administration left off when it comes to China-related sanctions; (2) multilateralism will be a distinguishing feature of Biden-era sanctions (see, also, Myanmar and Russia); and (3) China is in the early stages of developing effective counter measures to foreign sanctions.

As to the latter, in September 2020, China’s Ministry of Commerce (MOFCOM) published its Provisions for the Unreliable Entity List, laying out a framework for unilateral sanctions not unlike the List of Specially Designated Nationals (SDNs) from the US Treasury Department’s Office of Foreign Assets Control (OFAC). In January 2021, MOFCOM introduced the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, which could lead to “prohibition orders” blocking Chinese individuals and entities from complying with some foreign sanctions. Both MOFCOM orders could be used to target foreign persons whose actions threaten China’s development or national interests or harm Chinese companies, although neither has been used as of today. The Ministry of Foreign Affairs announcements name specific consequences for their targets but lack clear enforcement mechanisms or penalties. Although it’s not fully developed yet, China’s regulatory framework for sanctions is coming into focus. In the future, foreign sanctions that target China’s national interests are likely to be met with more robust counter-measures. Companies doing business with China will need to understand when and where these new rules apply to avoid getting caught in the middle.

Nick Turner is a registered foreign lawyer with Steptoe & Johnson in Hong Kong. He advises multinationals on investigations and compliance related to US economic sanctions and anti-money laundering regulations. He publishes a weekly briefing on sanctions available on LinkedIn and Medium.

Shannon Argetsinger

The recent two-day U.S./China Summit in Anchorage, Alaska was promoted as a stepping-stone toward building back the relationship between China and the U.S. In this instance… not so much. Sometimes, looking back to move forward, solving prior misconceptions and challenges before moving ahead, is essential to progress. This certainly appears to be one of those instances. U.S. Presidential Executive Order 13936, signed on 14 July 2020 by then President Trump, authorized targeted sanctions against foreign persons and entities. Since then, a bushel full of U.S. sanctions have been handed down. This singular action created a myriad of concerns including what reciprocal actions will be taken by China; what a vibrant sanctions strategy means for commerce, financial institutions, and global supply chains; and how to avoid stepping into the “bear trap” that’s now been set.

Therefore, as a matter of practical, responsible, strategy development, all MNCs, especially those in manufacturing and banking sectors, must pay strict attention to the vacillating sanctions landscape. Re-evaluating and modifying sanctions risk mitigation policies and procedures should rise to the top of corporate “to do” lists. Conducting robust, periodic, risk assessments and systems analyses will be imperative in building sound practices and defensible corporate cultures. Investing in Due Diligence practices and technologies to allay risk with be enormously helpful. Committing to refresh Due Diligence and Sanctions Screening on long established or trusted relationships should be conducted. Keeping in focus, all diligence should aim beyond the first layer of the Due Diligence “onion” into tertiary levels to help negate research missteps. Practical steps, like building service provider redundancies will provide options in case of a sanctions matter interfering with operations. Lastly, and often forgotten, investing in human capital and assigning experienced people to accomplish these key tasks is requisite. The recent two-day U.S/China summit did very little to alleviate the growing tensions created by targeted sanctions. Arguably, it exacerbated them. However, it did clearly articulate the heightened risk born from a sanctions-laden diplomatic strategy. Also, it most obviously provided us with a very real portrait of the posture being taken…by both sides. Proper, responsible, and effective diligence (including sanctions screening) practices with partners, old and new, will illuminate the path around the “bear trap.”

Sherman Yan and Dominic Wai

The potential evolution of the sanctions landscape between China and the new Biden administration from 2021 is difficult to predict. This is more of a political rather than legal question. It seems to us that the status quo will likely continue for a while in a tit-for-tat manner with the same magnitude. The more pressing question is how this landscape will affect Hong Kong and the businesses and investors here. Not all overseas sanctions are applicable to Hong Kong. Under Hong Kong law, an overseas sanction that is not automatically recognized and adopted in Hong Kong has no enforcement effect on businesses here. This is not a new position: Hong Kong judicial authorities from as early as the 1980s stated that the local Court is not bound to hold back from enforcing the laws of Hong Kong at the dictate of foreign Court orders. For example, the Court of Appeal judgment in F.D.C. Co. Ltd. v. Chase Manhattan Bank [1990] 1 HKLR 277 expressly stated that “no state would expect that the Courts of another country will enforce that legislation at the expense of their own laws”. In this case, two Court orders were in conflict: on one hand, U.S. issued enforcement orders for the production of information relating to the plaintiff’s bank accounts maintained with the defendant bank. On the other hand, a Hong Kong court-imposed injunction on the defendant bank against producing such information and record made on the strength of the defendant bank’s duty of confidentiality owed to its clients under Hong Kong law. In the end, the Court of Appeal refused to discharge the injunction i.e., the defendant bank would not be able to comply with the US enforcement orders.

Abiding by such long arm jurisdiction might cause Hong Kong businesses to have issue, in certain circumstances, with the national security law here in Hong Kong, and this could be a serious criminal matter. So, it comes down to a commercial decision that has to be made depending on one’s assessment of the geo-political risks of taking one course of action over the other. Well informed legal advice and risk assessment consultation will be mandatory to help clients to steer through a potential minefield of conflicting interests.

Sherman Yan and Dominic Wai are Partners with ONC Lawyers in Hong Kong