Impact of China's new Anti-Sanctions Legislation on Swiss Companies

On January 9, 2021, the Chinese Ministry of Commerce put into force a new regulation to combat unjustified foreign laws ("Blocking Rules"). The regulation aims to ban foreign sanctions and measures. On June 10, 2021, China followed suit and introduced an anti-sanctions law in response to U.S. measures, allowing the communist leadership in Beijing to impose sanctions on foreign individuals and organizations itself in the future. The following article provides an overview of how the new Chinese legislation regarding foreign sanctions measures could affect Swiss companies.

I.   "Blocking Statute" of January 9, 2021

The new blocking rules have potentially unpredictable consequences for Swiss companies:

According to Article 2 of the Blocking Rules, they will apply "[...] if the extraterritorial application of foreign laws and other measures in violation of international law and the fundamental principles of international relations unjustifiably prohibits or restricts China's citizens, legal persons, or other organizations from engaging in normal economic, trade, and related activities with a third country or its citizens, legal persons, or other organizations. »

Under Article 7, the Chinese Department of Commerce may order that it is prohibited to comply with certain foreign unjustified sanctions and measures.

If such bans are imposed and there is no exemption (Article 8), Western companies that, for example, break off existing business relations due to Western sanctions and measures will be liable to pay damages to the Chinese companies concerned, with a place of jurisdiction in China for corresponding claims (Article 9).

To date, the Chinese Department of Commerce has not issued any specific prohibitions based on this law. However, it cannot be ruled out that there could be pronouncements of prohibitions in connection with U.S. sanctions against various state-affiliated companies and/or in relation to the Xinjiang region. Until then, the law already has an impact in that Chinese individuals and companies are required to report repression based on foreign sanctions and measures to the Chinese Department of Commerce within 30 days (Article 5). The Chinese administration is thus collecting information to justify possible future bans.

II.   Anti-Sanctions Act of June 10, 2021

The new Anti-Sanctions Law is designed to preserve China's national sovereignty, security and development interests, and to protect the legitimate rights and concerned interests of Chinese citizens and organizations.

According to Article 4 of the Law, the relevant departments of China's State Council may newly decide to include persons or organizations directly or indirectly involved in the formulation, decision-making or implementation of foreign discriminatory restrictive measures in a countermeasures list.

In addition to the persons and entities included in this list, according to Article 5, the relevant departments of the State Council may also decide to apply direct countermeasures against the following persons and entities:

1) Spouses and immediate relatives of persons on the list;

2) Officers or actual controllers of organizations listed;

3) Organizations in which persons on the list serve as officers; and

4) Organizations in which persons on the list have actual control, or are involved in the establishment and operation.

The possible measures against such persons or entities range from travel bans to the seizure of assets to a ban on cooperating or conducting transactions with them in any form (Article 6).

Also of note is Article 12, which states that individuals or organizations may not implement, or assist third parties in implementing, discriminatory restrictive measures used by foreign nations against citizens or organizations of the Chinese nation. This is ultimately a prohibition on complying with foreign sanctions and measures against China. The ban affects both Chinese and foreign individuals and organizations.

If individuals and organizations fail to comply with such a ban, Chinese citizens and organizations can initiate litigation in the people's courts and demand that the individuals and companies concerned comply with the ban or stop violating Chinese law, as well as claim damages.

Finally, Article 15 allows for the possibility of taking measures against foreign states, organizations or persons.

III.  Impact on Swiss Companies

Should the Chinese Department of Commerce declare foreign sanctions and measures to be unlawful in the sense of Art. 7 of the Blocking Statute, Swiss persons and organizations would be forced to organize themselves in the sense of an "Incompliance Management". This means that individuals and organizations would then be faced with the choice of either respecting US sanctions, for example, and thus violating Chinese law, or violating the relevant US sanctions and measures and risking repression from the USA.

It is not clear whether every foreign sanction or measure is affected by the general prohibition under Art. 12 of the Anti-Sanctions Law, or whether this exclusively affects sanctions and prohibitions that have been expressly prohibited under Art. 7 of the Blocking Statute, and whether, in application of this law, the Chinese Department of Commerce, or the relevant departments of the Chinese State Council, can declare corresponding foreign sanctions and measures to be unlawful. However, if applicable, the impact on Swiss companies would be similar to that under the Blocking Statute.

In any case, Swiss companies with close business relationships with both China and the U.S. are likely to be affected by the rules in the near future. These companies should start assessing the potential impact of the new regulations on their business.

One possible approach to mitigate potential future sanctions-related supply chain disruptions would be to split production chains ("US-Free" production and "China-Free" production). A risk assessment of the business set-up and supply chains - as well as a review of contractual provisions such as export control and compliance clauses - are strongly recommended to avoid potential risks and negative consequences.

MME Compliance AG supports companies in all matters and questions related to China's new anti-sanctions legislation, in particular in the review of potential measures as well as contractual provisions such as export control and compliance clauses.

July 2021 | Authors: Raphael Brunner, Peter Henschel, David Meirich

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