China Issues Legislation to Block Unjustified Extra-territorial Application of Foreign Legislation and Measures

On January 9, 2021, the Ministry of Commerce ("MOFCOM") of the People’s Republic of China ("PRC") issued Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”), which are effective immediately. The Blocking Rules will serve as countermeasures to US and other extra-territorial sanctions and export control restrictions impacting business with Chinese companies and individuals.

As discussed further below, the new Blocking Rules have significant implications for multinationals (including Chinese affiliates of non-Chinese companies), who must now report within 30 days certain non-Chinese sanctions and export controls that restrict their business and who are now subject to potential monetary penalty exposure and potential private litigation in China for acts deemed to comply with an “unjustifiable” non-Chinese extra-territorial measure. 

This Legal Update summarizes the key features of the Blocking Rules and discusses their implications for relevant businesses, including subsidiaries of foreign companies in China.

BACKGROUND

The Blocking Rules are the latest in a series of Chinese countermeasures aimed at what in the Chinese view is an “unjustified” proliferation of extra-territorial sanctions and export control restrictions targeting Chinese interests. Notably, these include China’s recently promulgated Provisions on the Unreliable Entity List of September 19, 2020 (the “UEL Provisions”) as well as certain sanctions-related aspects of China’s National Security Law for Hong Kong.¹ In addition, the Blocking Rules reflect a model adopted by other jurisdictions (notably including the EU, UK and Canada) that have implemented similar “blocking” legislation with respect to the extra-territorial application of foreign sanctions and export control laws.

In promulgating the Blocking Rules, MOFCOM’s press releases referred to the need to “protect” Chinese citizens, legal entities and organizations registered in China (“PRC Persons”) from harm caused by “unilateral actions that interrupt normal trade activity.”² While the rules are not limited to the laws of any particular jurisdiction, it is generally understood that they are primarily targeted at compliance with US sanctions.

KEY REQUIREMENTS

What Types of Actions Do the Blocking Rules Seek to Counter?

The Blocking Rules target non-Chinese “legislation and other measures” whose extra-territorial application has the effect of prohibiting or restricting PRC Persons from “engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations” in violation of “international law and basic principles of international relations” (“Targeted Extra-territorial Measures”).  

Notably, the Blocking Rules make clear that, if the extra-territorial application at issue is provided for in an international agreement or treaty to which China is a party, it is excluded from the scope of coverage. The Blocking Rules do not provide further detail on terms such as “normal economic, trade and related activities” and “basic principles of international relations.”   

What Is the Scope of the Reporting Obligation and When Is It Triggered?

PRC Persons (including, but not limited to, Chinese-organized subsidiaries of non-Chinese parent companies) must file a report with MOFCOM with respect to any Targeted Extra-territorial Measure that prohibits or restricts its ability to engage in “normal economic, trade or other activities” with a third country entity or individual.  

The Blocking Rules require filing of the report within 30 days, and the information will be kept confidential upon the reporter’s request. Failure to file a required report may result in penalties “according to the severity of the circumstances.” The concept of Targeted Extra-territorial Measures includes both non-Chinese "legislation" and "other measures." Although the report does not define what constitutes an “other measure” for these purposes, other jurisdictions that implement similar blocking legislation have interpreted analogous reporting requirements to be triggered by not only the foreign law or regulation at issue but also policies, directives and actions undertaken by persons to implement or comply with such extra-territorial measures. For instance, the EU Blocking Regulation provides for similar notification requirements in case the economic and/or financial interests of certain EU operators are affected by not only the specifically listed extra-territorial legislation at issue but also actions based thereon or resulting therefrom.³

What Happens When a Report Is Filed?

A “Working Mechanism,” composed of relevant PRC authorities and led by MOFCOM, determines whether there exists an “unjustified” extra-territorial application of foreign legislation or measures based on the “overall” consideration of the following factors, which are very similar to those provided in the UEL Provisions:

• whether the international law or the basic principles of international relations are violated;
• potential impact on China’s national sovereignty, security and development interests;
• potential impact on the legitimate rights and interests of the PRC citizens, legal persons or other organizations; and
• “other factors that shall be taken into account.”  

Once the “Working Mechanism” has identified the existence of an “unjustified” extra-territorial application of foreign legislation or measures, MOFCOM will issue a prohibition order that prohibits the “recognition of, the execution of, and the compliance with” such foreign legislation or measures (the “Prohibition Order”).

Such provisions appear to be modeled on the EU Blocking Regulation, which empowers the European Commission to list in an Annex laws, regulations or other legislative instruments considered to have unlawful extra-territorial application and to cause adverse effects on the interests of the Union and of natural and legal persons engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries.⁴ The EU Blocking Regulation then (i) forbids the recognition or enforcement of judgments or decisions giving effect to the laws listed in its Annex or actions based thereon or resulting therefrom and (ii) prohibits compliance, in general terms, with the requirements or prohibition based on or resulting from the laws listed in its Annex or actions based thereon or resulting therefrom.⁵

The main differences between the Blocking Rules and the EU Blocking Regulation lie in (i) the scope of the reporting requirements and (ii) the way extra-territorial laws are identified and listed as subject to restrictions on recognition, enforcement and compliance.⁶

A Prohibition Order is reasonably expected to apply to PRC Persons, which should include a PRC citizen located outside China and the subsidiaries of a foreign company that are incorporated in China as the foreign investment enterprises (the “FIEs”) under the PRC law. Similar to the EU Blocking Regulation, the Blocking Rules also permit a PRC Person to apply for exemptions from a Prohibition Order with MOFCOM. Such an application must indicate the rationale of such an application and the scope of the exemptions sought. MOFCOM has 30 days to make a decision. However, the rules do not specify the criteria for MOFCOM to grant the exemptions, which gives MOFCOM substantial discretion in its decision-making.

The “Working Mechanism,” “based on actual circumstances,” may suspend or withdraw a Prohibition Order, which highlights again the discretionary aspect of these rules.

When Can a Claim Be Made Before a PRC Court?

Under the Blocking Rules, a PRC Person is entitled to make a claim before a PRC court against a “person involved” that:

      i) has complied with the foreign legislation or measures subject to a Prohibition Order unless that “person” has obtained an exemption, as mentioned above; or

     ii) has benefited from a judgement or ruling made in accordance with the foreign legislation subject to a Prohibition Order.

Where such a “person” refuses to execute a PRC court judgement or ruling, the PRC Person can request a compulsory enforcement of such judgement or ruling by the PRC court.

Similar provisions exist under the EU Blocking Regulation. While there has been little public enforcement of the EU Blocking Regulation, private parties have referred to national courts to claim unlawful breaches of contracts or request contracts to be executed when such breaches or non-performance was contrary to the EU Blocking Regulation. This has resulted in significant private enforcement of the EU Blocking Regulation.

What Are the Penalties?

PRC Persons (including the FIEs in China) must fulfill their reporting obligation as mentioned above and, unless an exemption is obtained, comply with the Prohibition Orders. Violations would expose the person to various types of penalties ranging from warning, rectification to administrative fines.

IMPACT ON BUSINESS GOING FORWARD

As with other recently adopted Chinese countermeasures to sanctions and export controls, it remains to be seen how China will interpret and implement the new Blocking Rules. Nonetheless, it is clear the new Blocking Rules have significant implications for both Chinese and non-Chinese companies whose business dealings may be impacted by Targeted Extra-territorial Measures. Both Chinese and non-Chinese entities should be mindful of the litigation risks created under this new regime in managing third-party relationships in China that may be impacted by these rules. Experience managing multi-jurisdictional sanctions and blocking statute issues in other contexts has shown the importance of close coordination between commercial, disputes and sanctions counsel in managing and mitigating potential litigation risks arising from these issues. In addition, effective January 9, Chinese entities must consider whether and to what extent they may have reporting obligations to ensure compliance with the 30-day reporting requirement. More generally, potentially impacted companies (including non-Chinese entities with Chinese affiliates and counterparties) must carefully assess their risk exposure to potentially conflicting legal obligations in light of the new Blocking Rules. 

Going forward, many aspects of the Blocking Rules (such as the definition of “normal economic, trade and related activities,” and the application of the Prohibition Orders to a third party in a third country) will need to be clarified. Companies should closely monitor the actions and practice of the “Working Mechanism,” especially those by MOFCOM.